Financial Due Diligence in Depth

The accounts can be 100% correct — and still give a misleading picture of what the business will genuinely earn going forward. That's exactly what financial due diligence is after.

Short answer: Financial due diligence is the financial part of the overall due diligence process. It doesn't just examine whether the accounts are correct (that's the audit's job) — it examines whether the earnings are sustainable and genuinely reflect the business's future earning power.

Quality of Earnings: Are the earnings "clean"?

Have the earnings been normalized for one-off items, owner salaries above or below market level, and other matters that won't recur after a change of ownership? That's the core of what's called "Quality of Earnings" (QoE).

Quality of revenue

How stable and recurring is the revenue? Is there a high customer concentration, where losing a single customer would hit hard? These kinds of questions often weigh more heavily for a buyer than the top-line figure itself.

Working capital and debt

See working capital adjustment — how has it developed, and what's a normal level? And see net debt — all interest-bearing obligations, including hidden debt-like items.

Does the budget hold up?

Do the business's own projections and budgets hold up when compared against the actual history? Large, unexplained deviations are a red flag for any buyer.

Why is it so central to the price?

Most valuations start from EBITDA (see business valuation) multiplied by a multiple. If financial due diligence reveals that part of the reported EBITDA is actually due to one-off income or non-market-conforming matters, it can directly reduce the price.

How to prepare as a seller

Good preparation is about being able to explain and document deviations before the buyer finds them themselves: keep track of one-off items, make sure owner salary reflects a realistic market salary, and have documentation ready for major customer and supplier relationships. See also vendor due diligence, if you want to have this investigation done yourself before a buyer does.