due-diligence
Financial due diligence is the buy-side (or vendor) review of historical financials, cash conversion, net debt, working capital and earnings quality. Its job is to turn reported accounts into a deal basis the parties can price.
A financial due diligence team is not issuing an audit opinion. It is reconstructing how the business makes money and whether that money is available to a new owner. Typical work includes a quality of earnings analysis, a net debt / net cash schedule, a normal working capital analysis, cash-flow conversion, related-party items, and a review of accounting policies against IFRS or local GAAP.
The output is usually a report plus schedules the lawyers will later attach to a completion accounts or locked box mechanism.
Reported EBITDA is a starting point, not a conclusion. FDD asks: which customers are recurring, which costs are owner-discretionary, which revenue was pulled forward, which expenses were capitalised that a buyer would expense, and which “one-offs” have a habit of repeating. That is why FDD and QoE are often used as near-synonyms on mid-market deals even though QoE is a subset of the financial workstream.
Management presents €4.0m EBITDA. The FDD bridge removes €0.25m of non-recurring grant income, adds back €0.40m of above-market founder salary that will not continue, and deducts €0.15m of under-accrued bonuses. Adjusted EBITDA is €4.0m — coincidentally the same headline, different composition. Separately, unrecorded factoring and a shareholder loan push net debt up by €1.8m. At 8×, that single schedule is worth more than the entire earnings debate.
Buyers use FDD to set the equity cheque. Sellers use a vendor FDD to pre-empt chips. Banks and unitranche lenders read the same pack to set leverage and springing covenants. Private equity investment committees almost never approve a control deal without it.
Equating a clean audit with a clean deal basis. Ignoring intra-year seasonality when setting a working-capital peg. Treating add-backs as optional if the SPA does not lock the definition. Forgetting that cash in the bank is not free if it is customer prepayment.
FDD is historical plus a limited look-forward. It will not value the franchise — that is commercial due diligence and business valuation. It also cannot see what management declines to put in the data room.
The expensive part of FDD is rarely the last 10% of analysis. It is rebuilding trial balances, customer files and debt schedules from inboxes. A structured financial layer lets the QoE, the valuation and the purchase price adjustment start from the same source.