Resource
Financial due diligence checklist
A working checklist of the analysis a buy-side or sell-side financial due diligence exercise should cover: quality of earnings, net debt, working capital, cash conversion and close-out. Written from live transaction work rather than a generic template.
How to use this checklist
Financial due diligence is not an audit. It does not provide an opinion on the financial statements; it establishes what a buyer is acquiring in terms of sustainable earnings, the debt-like obligations that reduce equity value, and the working capital the business needs to operate at a normal level.
The scope below is the full set of work a mid-market transaction typically requires. On a specific deal it should be narrowed to the areas where value is concentrated and risk is plausible. Each section states the analysis, not the conclusion — the conclusion depends on the business, the sector and the deal structure.
Items marked here as separate lines frequently overlap in practice. The discipline that matters most is ensuring no item is double-counted between the earnings adjustment, the net debt schedule and the working capital peg.
01
Information request and data foundation
Diligence quality is set by the data you obtain in the first week. Establish the reporting basis, the period under review and the reconciliation between management accounts and statutory financials before any analysis begins.
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Monthly trial balance for the review period
Typically 36 months plus the current stub period, at the lowest available level.
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Statutory financial statements and audit files
Including audit adjustments, management letters and any qualification.
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Management accounts reconciled to statutory results
Quantify and explain every unreconciled difference; it usually hides an adjustment.
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Revenue detail by customer, product and month
Required for concentration, cohort, price/volume and seasonality analysis.
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Aged debtors, creditors, inventory and accrual listings
Monthly, at balance-sheet dates, to support working capital normalisation.
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Debt agreements, leases and off-balance-sheet commitments
Includes covenants, security, related-party balances and contingent obligations.
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Payroll register and headcount by function
Supports run-rate testing, one-off compensation and pro forma cost analysis.
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Budget, forecast and board packs
Assess forecasting accuracy against actuals before relying on management projections.
02
Quality of earnings
A quality of earnings analysis establishes the sustainable, run-rate earnings a buyer is actually acquiring. Every adjustment should be evidenced, quantified and traceable to source data, and presented so the counterparty can test it line by line.
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Revenue recognition policy and cut-off testing
Confirm timing, over-time versus point-in-time recognition, and period-end cut-off.
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Non-recurring income and expenses
Restructuring, legal settlements, transaction costs, insurance recoveries, asset disposals.
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Owner and related-party items
Above- or below-market compensation, rent, management charges and personal expenses run through the business.
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Accounting policy normalisation
Capitalisation versus expensing, provisioning approach, revenue and inventory policies aligned to the buyer's basis.
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Run-rate and annualisation adjustments
Full-year effect of price changes, contract wins and losses, new sites and headcount added mid-period.
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Pro forma effects
Acquisitions, disposals, standalone costs and public-company or new-owner cost structures.
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Margin bridge by driver
Decompose EBITDA movement into price, volume, mix, cost inflation and one-offs.
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Customer concentration and contract durability
Retention, churn, renewal dates, change-of-control clauses and pricing power.
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Adjusted EBITDA bridge
Reported to adjusted, each adjustment labelled recurring, non-recurring or pro forma.
03
Net debt and debt-like items
Net debt determines the bridge from enterprise value to equity value. Disputes rarely concern the bank loan; they concern what else qualifies as debt-like. Define the treatment of every item in the sale and purchase agreement rather than leaving it to interpretation.
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Third-party borrowings
Bank debt, overdrafts, revolvers, shareholder loans, accrued and unpaid interest, break costs.
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Lease obligations
Finance and operating lease liabilities, with treatment consistent with the EBITDA definition used.
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Deferred and contingent consideration
Earn-outs and deferred payments from prior acquisitions still outstanding at completion.
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Tax liabilities
Corporate tax, indirect tax, payroll tax arrears and identified exposures from tax diligence.
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Employee-related obligations
Bonuses, gratuity and pension deficits, accrued leave, transaction and retention payments.
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Deferred capital expenditure and maintenance shortfalls
Underspend that a buyer must fund shortly after completion.
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Provisions, disputes and unusual creditors
Litigation, warranty and dilapidation provisions, and overdue creditors beyond normal terms.
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Restricted and trapped cash
Security deposits, minimum operating balances and cash not freely distributable.
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Completion mechanism
Confirm locked box versus completion accounts, the leakage definition and who bears interim risk.
04
Working capital review and the peg
The working capital peg protects the buyer from acquiring a business that has been drained of liquidity before completion. Setting it requires a defensible normal level, not a single month-end snapshot.
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Define the working capital scope
State explicitly which balances are included and confirm no item is counted in both working capital and net debt.
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Monthly trend over at least 24 months
Establishes the normal range, seasonality and structural trend rather than a point estimate.
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Seasonality and average-versus-year-end analysis
Test whether the completion date sits at a naturally high or low point in the cycle.
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Days ratio analysis
DSO, DIO and DPO by month, with explanations for any step change in the review period.
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Quality of receivables and inventory
Ageing, bad debt provisioning, slow-moving and obsolete stock, and provisioning adequacy.
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Creditor stretch and one-off collections
Payment run timing, factoring, supply chain finance and pre-completion collection acceleration.
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Non-recurring and deal-driven distortions
Remove balances arising from one-off events before setting the normal level.
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Peg proposal and true-up mechanism
Basis of the target, adjustment formula, dispute resolution and preparation responsibility.
05
Cash flow, capital expenditure and forecast testing
Earnings quality is confirmed by cash conversion. Test whether reported profit converts to cash and whether the forecast the price is based on is supported by historical performance.
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Free cash flow bridge
Adjusted EBITDA to operating cash flow to free cash flow, with conversion by year.
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Maintenance versus growth capital expenditure
Split by category and test against asset age, depreciation and management representations.
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Historical forecast accuracy
Compare prior budgets to actuals to calibrate reliance on the current plan.
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Forecast driver testing
Trace each assumption to contracted revenue, pipeline, price changes or committed cost savings.
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Funding requirement at and after completion
Peak intra-month working capital swing, covenant headroom and liquidity buffer.
06
Reporting and close-out
Diligence output is only useful if it converts into negotiating positions and contractual protections. Every finding should map to a price, mechanism or warranty consequence.
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Findings summary with deal implications
Each finding stated with quantum and its effect on price, peg, net debt or structure.
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Databook of linked analysis
Excel workbook where every schedule traces back to source data without manual overrides.
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Open-item and management question tracker
Maintained through to signing, with responses and resolution status recorded.
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Input to the sale and purchase agreement
Definitions of debt, cash and working capital, plus specific indemnities for identified exposures.
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Post-completion handover
Analysis handed to the integration or finance team with assumptions documented.
Related engagement
Volaxi provides financial due diligence support as a defined analytical workstream alongside the lead advisory team.
Discuss an Engagement
If you require support with financial modelling, business valuation or financial due diligence for a live transaction or strategic engagement, we'd be pleased to discuss your requirements.