Financial Due Diligence Checklist
In the M&A ecosystem, due diligence is the cornerstone of informed decision-making. More than a conventional audit, it is a thorough and critical investigation designed to validate the investment thesis, confirm the accuracy of the information presented and—most importantly—identify hidden liabilities that could jeopardize the viability of the transaction.
Conducting a rigorous review is not merely a compliance exercise; it is a safeguard for capital. A well-executed due diligence enables the investor to move from a theoretical valuation to a closing price grounded in the asset’s true operating and financial reality. Under this premise, due diligence is not an end in itself, but a means to achieve three critical strategic objectives:
- Risk mitigation, by identifying contingent liabilities or fraud that could destroy value post-acquisition.
- Valuation adjustment, as findings such as inflated EBITDA or insufficient maintenance capex can support a technically grounded price renegotiation.
- Integration planning, by providing the deep understanding required to design the transition plan and identify synergies from day one.
In this blog post, we focus primarily on Financial Due Diligence (FDD), centred on Quality of Earnings (QoE), working capital analysis, and the net debt structure.
However, a strategic perspective requires going further. It is not enough to validate the numbers; we must understand the forces that sustain them—and the risks that could destabilize them.
A truly holistic view expands the scope to other critical areas that directly interact with asset value (i.e., due diligence workstreams beyond the financial one):
- Legal, Tax, and Labour: protecting the deal from hidden contingencies. The goal is to ensure the tax structure is as efficient as possible and to fully understand the company’s real commitments to its workforce—avoiding legal or labour “surprises” after taking control.
- Commercial and Market: validating whether the competitive position is resilient, assessing demand durability, and confirming whether growth projections are realistic or overly optimistic.
- Operational: focusing on the operating engine—ranging from supply chain efficiency to installed capacity and the feasibility of cost synergies.
- Technology (IT): in the digital era, assessing the robustness of the tech stack is essential. This includes reviewing the ERP and management systems to ensure the data architecture is scalable, secure, and capable of supporting projected growth.
- Environmental and Sustainability (ESG): sustainability is now a valuation driver. The analysis goes beyond environmental compliance to include business model resilience against new governance and social responsibility requirements.
It is critical to understand that none of these blocks operates in isolation. Operational or IT findings often directly impact the financial model; for example, an obsolete IT infrastructure may require unplanned capex that reduces the final valuation. This 360-degree approach is what connects findings into a strategic roadmap for the investor—turning technical analysis into a clear decision-making guide.
Next, we focus on Financial Due Diligence, starting from the premise that financial analysis is the engine that structures—and gives meaning to—the overall valuation of the business.
Financial Due Diligence
Financial Due Diligence (FDD) is the analytical core of the transaction. Its mission is not only to verify that accounting is correct, but to determine whether the business truly generates the cash it claims—and whether it can keep doing so going forward. In essence, it is the tool that allows the buyer to stop seeing “numbers on paper” and start seeing the underlying cash reality.
What defines a strong, professional due diligence? Before diving into the figures, we need to set out the three pillars that distinguish a superficial review from a high-quality one:
- Focus on the “bridge” (value bridge): a professional report does not deliver isolated data; it builds a logical bridge. It explains step by step how we move from the seller’s reported EBITDA to Adjusted EBITDA (removing extraordinary, non-recurring, or personal items) and how this ultimately flows through to Equity Value.
- Identification of deal breakers: the experienced analyst must identify critical risks that could derail the transaction. It is not only about reporting issues, but flagging when a finding threatens the investment’s viability.
- Forward-looking analysis: while accounting is a snapshot of the past, a strong FDD uses historical data to stress-test the future—assessing whether yesterday’s cash flows are repeatable tomorrow.
To structure the diagnosis strategically, we typically frame the financial analysis around three interconnected pillars that help us understand true profitability, balance sheet robustness, and cash health:
Quality of earnings
This is the analysis with the greatest impact on price, as most private companies are priced on an EBITDA multiple in negotiations. The primary focus here is Adjusted EBITDA.
- Normalization analysis: we do not accept the profit shown in statutory accounts at face value. We look for “clean” EBITDA, stripping out owner personal expenses, gains from one-off asset sales, or extraordinary fines. The aim is to determine what the buyer will earn in a “normal” year.
- Revenue quality: we analyse recurrence. Are revenues backed by signed contracts or driven by sporadic sales? One million euros of profit relying on a single customer is far riskier (and worth less) than the same profit diversified across a thousand customers.
- Business plan validation: we stress-test forward projections. If the seller claims 20% growth, we assess whether the company has the operational capacity to deliver—or whether it is merely optimistic “paper.”
Balance sheet stability and net debt
If the previous section tells us what we earn, this section clarifies what we truly owe and what we truly have. It is essential to move from business value to the final price transferred to the seller.
- Identification of “debt-like items”: professionals look for liabilities that do not look like debt. Beyond bank loans, we often deduct from price items such as deferred taxes, unpaid severance obligations, declared-but-unpaid dividends, or litigation with a high probability of loss.
- Asset integrity: we confirm that what appears on the balance sheet exists and is worth what it claims. We assess whether machinery is obsolete or whether receivables are collectible in practice.
- Maintenance capex: we evaluate how much the business must reinvest each year just to sustain operations. If the seller has underinvested to conserve cash, the buyer may inherit an immediate financial “hole.”
Cash flow and working capital
Working capital analysis (Net Working Capital) – critical point: this is often where last-minute negotiation battles are won.
We define what level of inventory and outstanding invoices the company needs to operate. If, at handover, the seller has “emptied” inventory to show more cash, they are effectively delivering a car without fuel. Parties typically agree a normalized working capital level to adjust price at closing.
Cash conversion cycle: we analyse the time between paying suppliers and collecting from customers. A business can “die of success” if it grows but collects too slowly, creating liquidity stress.
These three financial pillars are not silos; a net debt finding or a working capital adjustment can fundamentally reshape the SPA economics.
Financial Due Diligence Checklist
Below is a detailed, operational breakdown of the items that should be reviewed, analysed, and verified during Financial Due Diligence. This checklist combines an accounting perspective with a risk and business lens.
1. Corporate information and general compliance
Before analysing numbers, you must understand the legal and corporate structure that produces them. Risks here are often binary: they either exist or they do not—and their impact can be total.
Corporate structure
- Documents and analysis: detailed group structure chart. List of all subsidiaries, branches, and joint ventures. Full cap table including ultimate beneficial owners.
- Strategic objective and risks: confirm legal ownership of shares. Identify tax complexity arising from holding structures or subsidiaries in tax havens.
Articles of association and minutes
- Documents and analysis: incorporation deeds and current articles of association. Board and shareholder meeting minutes (last 3–5 years). Shareholders’ agreements.
- Strategic objective and risks: detect shareholder disputes, declared-but-unpaid dividends (hidden debt), or restrictions on share transfers (drag-along/tag-along rights).
Key contracts
- Documents and analysis: list of material contracts (>5% of revenues/costs). Review change of control clauses.
- Strategic objective and risks: determine whether a sale triggers termination of critical customer or supplier contracts.
Compliance
- Documents and analysis: operating licences and sector permits. Record of regulatory/administrative sanctions.
- Strategic objective and risks: confirm the company has the legal right to operate. Loss of licence is a potential deal breaker.
2. Quality of earnings (Income Statement / P&L)
The objective is to translate accounting profit into sustainable operating cash flow.
Revenue: not every euro of revenue is equal. We look for quality, recurrence, and predictability.
- Sales breakdown: monthly sales by customer, product, distribution channel, and geography for the last 36 months.
- Customer concentration: assess whether the top 10 customers represent more than 30–40% of sales. Review relationship tenure and whether revenues are supported by framework agreements vs. spot orders.
- Churn analysis: for subscription or recurring models, calculate gross and net retention. High growth with high churn is a warning sign on product quality.
- Revenue recognition: verify cut-off policies. Are sales booked before delivery to meet year-end bonus targets? Compare delivery notes vs. invoice dates.
- Backlog: analyse signed orders pending execution. Does it support the next 6 months’ sales projections?
Costs and margins: understanding the cost structure helps identify inefficiencies and validate operating leverage.
- Gross margin by product: unit economics analysis. Are products being sold at a loss to gain market share?
- Cost of goods sold (COGS): confirm correct allocation of direct costs. Sometimes operating costs are reclassified into overheads to inflate gross margin.
- Personnel costs: anonymised employee list with salary, tenure, role, and bonus. Analyse wage evolution vs. sales. Identify below-market pay (risk of talent flight post-acquisition).
- SG&A: trend analysis of rent, utilities, marketing, and professional services. Detect anomalous movements.
- EBITDA adjustments (normalization)
This is the key to valuation. A detailed EBITDA bridge table is required.
- Non-recurring items: identify and document extraordinary severance, relocation costs, fines, insurance claims, and sell-side advisory costs (deal fees).
- Pro forma adjustments: normalize shareholder salaries to market, remove personal expenses (luxury cars, family travel), adjust related-party rents to market levels.
- Negative synergies: incremental costs the buyer will incur (e.g., hiring a CFO if the owner currently performs the role, new insurance policies, external audit).
3. Balance sheet and net assets
Validation of the existence, ownership, and true valuation of assets.
Fixed assets and intangibles
- Tangible fixed assets: fixed asset register. Reconcile to accounting. Identify fully depreciated assets still in use.
- Asset condition: technical report on machinery condition. Does it require immediate investment (deferred maintenance)?
- Intangibles: review capitalization of R&D costs. Some companies capitalize payroll as R&D to improve EBITDA, which may be accounting-inaccurate and tax-risky.
Inventory
- Inventory ageing: inventory ageing report. Identify slow-moving (>12 months) or obsolete stock.
- Valuation: valuation method (FIFO/LIFO/weighted average cost). Check whether indirect manufacturing overheads are inappropriately loaded.
- Reserves: adequacy of obsolescence provisions. Adjustments can directly impact price (via net debt or working capital).
Accounts receivable
- A/R ageing: customer ageing report; analyse balances overdue >90 days.
- Collectability: historical defaults and allowance for doubtful accounts (bad debt reserve).
- Risk concentration: credit exposure to specific customers in financial distress.
4. Working capital and cash flow
Normalized working capital (the “peg”)
- Monthly history: monthly calculation of net working capital (operating current assets minus operating current liabilities) over the last 24 months.
- Normalization adjustments: remove non-operating items from working capital (e.g., shareholder receivables, deferred taxes, short-term financial investments).
- Peg definition: set the target working capital level for the SPA. If the seller delivers less than the peg, the purchase price is adjusted downward.
Suppliers and payables
- A/P ageing: supplier ageing report. Are suppliers being paid on time?
- Dependency: concentration of purchases with single-source suppliers; supply chain disruption risk.
- Payment terms: have supplier payment days been artificially stretched to show more cash pre-sale? This is effectively hidden debt that will surface post-acquisition.
5. Net debt and “debt-like items”
A list of everything that reduces Enterprise Value.
- Financial debt: loans, revolving credit facilities, finance leases, profit-participating loans. Impact: deducted from price (100%).
- Derivatives: mark-to-market value of interest rate or FX swaps. Impact: if negative, it is debt.
- Labour liabilities: accrued but unpaid bonuses, agreed severance, unused vacation accruals, underfunded pension plans. Impact: treated as debt-like items.
- Taxes: deferred tax liabilities, tax audit assessments, probable tax contingencies (CIT, VAT). Impact: deducted from price or held back (escrow).
- Deferred capex: immediate reinvestment required to replace critical assets that the seller did not maintain. Impact:price adjustment akin to debt.
- Dividends: dividends approved but not yet paid. Impact: liability owed to outgoing shareholders.
6. Tax and legal (financial impact intersection)
While these areas are specialist-driven, the impact is purely financial.
- Tax audits: review the last 4 fiscal years (or any non-statute-barred periods) for all applicable taxes (Corporate Income Tax, VAT, Personal Income Tax withholdings).
- Transfer pricing: where there are cross-border intragroup transactions, confirm supporting documentation exists and pricing is at arm’s length—high risk of tax contingency otherwise.
- Tax assets: validation of tax loss carryforwards (NOLs). Will they be limited or lost upon a change of control?
- Litigation: quantify ongoing claims (labour, commercial, IP). Assess whether provisions are required in the closing balance sheet.
Conclusion
Due diligence is not a box-ticking exercise or a sign of mistrust toward the seller; it is the structured, analytical process that ensures capital is deployed safely and with strategic judgment. A rigorous review—built on a comprehensive checklist like the one set out above—allows the buyer to move from an initial, often incomplete snapshot of the business to a deep, data-driven understanding of its inherent risks and its real value-creation levers.
Carrying out this work with a professional, multidisciplinary approach is what makes the critical difference between an acquisition that destroys value when previously unseen risks crystallize, and an investment that succeeds thanks to an entry price aligned with the company’s true economics and a realistic integration plan. The outcome of a merger or acquisition is not determined only at the notarial signing, but by the quality and depth of the questions asked during the pre-closing investigation.
If you are negotiating a potential acquisition, Maraz Corporate Finance has extensive experience delivering Financial Due Diligence for companies.
Buying well starts with better diligence.
Javier de Rojas Roca de Togores
Partner- Maraz Corporate Finance
