Updated · I need a Fractional CFO

Financial due diligence support for buyers and sellers

A buyer wants to understand what drives the results, how cash is generated and which assumptions could change the deal assessment. A seller needs consistent records and evidence to answer those questions. These are related tasks, but they are not the same engagement.

Start by identifying who the work is for, the decision it supports, the areas to examine and who may rely on the output. Management preparation is distinct from an independent buyer-side or vendor due diligence report. A formal report or third-party reliance requirement must be assessed and agreed separately before any commitment.

Financial due diligence checklist: questions to investigate

  • Revenue: how do recorded sales reconcile to contracts, billing and collections? How concentrated are customers?
  • Earnings: which adjustments are proposed, what evidence supports them and are costs truly non-recurring?
  • Working capital: how do debtors, creditors and stock change through the trading cycle?
  • Cash and debt: which balances, commitments or debt-like items need discussion under the proposed terms?
  • Forecasts: which assumptions are supported by contracts, capacity or historical evidence?
  • Information quality: which records are missing, provisional or inconsistent?

This is an initial financial checklist, not a complete transaction programme. Legal, tax, commercial, operational and technology work may require separate specialists. The transaction and intended users determine the detailed scope.

Quality of earnings: test adjustments rather than accepting them

Suppose reported EBITDA is £300,000. Management proposes adding back £40,000 of relocation costs and £20,000 of recruitment costs, producing a proposed £360,000 adjusted figure.

If recruitment is a recurring operating cost, a reviewer may reject that £20,000 adjustment. If the relocation adjustment is supported and accepted, the illustrative adjusted figure would instead be £340,000. The £40,000 adjustment itself also needs evidence and assessment.

These hypothetical figures illustrate a review process, not an agreed valuation basis. Keep reported results, proposed adjustments and accepted adjustments separate. Retain supporting invoices and explain whether similar costs are likely to recur.

Working capital and financial evidence

A single balance sheet date may not represent the cash needed to run the business. Review monthly patterns, overdue items, stock quality and seasonality. Any working capital target, definition or completion adjustment depends on the negotiated transaction terms and advice from the appointed deal team.

Prepare an indexed financial data room with version control. Typical starting information includes recent annual and monthly accounts, trial balances, bank reconciliations, aged debtors and creditors, revenue analysis, borrowing schedules and the current forecast. Share sensitive files only through an agreed secure process, not the enquiry form.

Agree the outputs, timetable and fee

A preparation or analysis engagement can produce an information index, reconciled schedules, an earnings adjustment log, a working capital analysis and an open-questions register. State unresolved limitations plainly. Do not turn an unanswered question into an assurance that no issue exists.

Fees and timing depend on access, data quality, scope and deadlines. For broader decision support, see M&A CFO support. Sellers can start with exit preparation; buyers should also plan finance integration.

Further reading: ICAEW’s financial due diligence guideline overview explains the role of FDD in transaction decisions.

Your questions, answered.

Is financial due diligence the same as an audit?

No. Financial due diligence is scoped around a transaction and its users. It is not a statutory audit and this service does not imply an audit opinion.

Can a buyer or lender rely on the work?

Reliance must not be assumed. Intended users, independence, report scope and any reliance arrangements need to be assessed and agreed separately before work starts.

How long does financial due diligence take?

Timing depends on scope, access to records, information quality and how quickly questions can be answered. Discuss the transaction deadline before agreeing a timetable.