Financial due diligence checklist: what to review before a deal.

Quick answer: A useful financial due diligence checklist does more than confirm that totals agree. It tests how earnings were generated, how reliably profit converts to cash, which balances could change the purchase price and whether management information is consistent enough to support the deal thesis.

Every transaction has a different scope. A buyer of a recurring-revenue business will ask different questions from a lender reviewing a working-capital facility. The checklist below is a starting structure, not a substitute for transaction-specific materiality, legal advice, tax diligence or an agreed engagement scope.

1. Define the decision and scope first

Before requesting data, identify the decision the work must support. Is the team validating headline EBITDA, negotiating a working-capital mechanism, testing debt capacity or preparing a business for sale? The answer determines which analyses deserve the most time.

• Transaction perimeter, entities, geographies and periods covered.
• Buyer, seller, lender or investor perspective.
• Materiality thresholds and known commercial concerns.
• Expected outputs: databook, issue list, exhibits, report support or management questions.
• Timetable, review responsibilities and access to management.

2. Test source-data quality

A polished management presentation cannot compensate for weak underlying records. Begin by reconciling the information pack to ledgers, trial balances, audited or filed accounts and—where relevant—bank or operational records. Document unexplained gaps instead of carrying them silently into later analysis.

• Monthly trial balances and chart of accounts.
• Detailed general ledger and journal listings.
• Management accounts and statutory financial statements.
• Customer, product, location or channel-level revenue data.
• Accounts receivable, payable and inventory ageing.
• Debt, lease, cash and contingent-liability schedules.
• Budgets, forecasts and the assumptions supporting them.

Build a data request list your team can track

Assign an owner, period, source, due date and status to each request. Agree the transaction perimeter before requesting records, and keep unanswered questions visible to the lead adviser. Share confidential material only through the agreed engagement channels.

Download the FDD data request starter (.txt)

3. Analyse earnings and Quality of Earnings

Reported EBITDA is a starting point. Quality of Earnings analysis asks whether the earnings are recurring, supported by normal operations and consistent with the commercial story. Build the bridge from reported performance to the measure used in valuation or deal discussions.

• Separate recurring trading performance from one-off, exceptional or non-operating items.
• Review owner, related-party and management adjustments.
• Test cut-off, revenue recognition and unusual period-end journals.
• Assess customer, product and channel concentration.
• Compare gross margin and operating-cost trends across months and years.
• Identify run-rate changes that are supported by evidence rather than assumption.

Adjustments should be individually described, quantified and linked to source support. Avoid presenting a single adjusted EBITDA number without a transparent bridge.

4. Understand revenue quality

Revenue analysis should explain what changed and why. Depending on the business model, useful views may include customer additions and losses, price and volume, recurring and non-recurring income, contracted and uncontracted revenue, churn, retention or project completion.

• Reconcile revenue analysis to the general ledger.
• Review top-customer concentration and movement.
• Identify unusual credit notes, rebates, returns and manual adjustments.
• Compare invoicing, delivery and cash collection patterns.
• Test whether reported recurring revenue meets the definition used in the deal.

5. Review working capital

Working capital can affect both valuation and the amount of cash needed after completion. Analyse monthly trends—not only two balance-sheet dates—and distinguish normal seasonal movement from delayed collections, stretched suppliers or classification issues.

• Monthly receivables, payables and inventory trends.
• Ageing, overdue balances and subsequent settlement.
• Seasonality and month-end management actions.
• Non-trading or debt-like items included in working capital.
• Potential normalisation methodology and reference period.
• Consistency between working-capital definitions and transaction documents.

6. Build the net-debt and debt-like item schedule

Net debt is rarely limited to bank loans less cash. Review the transaction definition and identify items that may represent financing, deferred consideration, obligations from earlier periods or cash that is not freely available.

• Borrowings, overdrafts and accrued interest.
• Lease liabilities and asset-finance arrangements.
• Shareholder or related-party balances.
• Factoring, supply-chain finance and similar facilities.
• Unpaid transaction costs, bonuses or prior-period liabilities.
• Restricted cash, trapped cash and outstanding payments.

7. Test cash conversion

Profit that does not convert into cash deserves explanation. Prepare a bridge from earnings to operating cash flow and identify whether the difference reflects working-capital investment, capital expenditure, tax, exceptional items or weaknesses in earnings quality.

Where cash-flow statements are unavailable or unreliable, reconstruct cash movement using balance-sheet and ledger information, then reconcile to bank or reported cash positions.

8. Challenge the forecast

A forecast should connect to recent operating evidence. Compare historical performance with the plan, isolate key assumptions and build sensitivities around the variables that matter most.

• Revenue growth by customer, product or business driver.
• Gross margin and operating leverage.
• Hiring, compensation and other step costs.
• Working-capital and capital-expenditure requirements.
• Downside liquidity and covenant headroom.
• Bridge from latest actual results to forecast starting point.

9. Convert analysis into decision points

A diligence output should make the implications visible. Separate confirmed findings, judgemental items and open questions. For each material issue, state the evidence, financial effect where measurable, uncertainty and the next action.

Questions to ask management

1. Which changes in the last 24 months are structural rather than temporary?
2. Which customers, suppliers or employees are most important to the forecast?
3. What does management believe is non-recurring, and what evidence supports that view?
4. Which liabilities or commitments are not visible in the monthly management accounts?
5. Where do reported KPIs require manual calculations or judgement?
6. What information would management improve if the process started again?

When specialist FDD support helps

Additional capacity is useful when a deal team needs a reconciled databook, Quality of Earnings bridge, working-capital analysis or structured review-note process within a compressed timetable. Plus One provides outsourced FDD and QoE analytical support under the lead team’s scope, templates and review cadence.

Reviewed by Rajat Gupta, ACA

Director at Plus One Management Services with KPMG experience across transaction support and financial due diligence. This guide is general information and does not constitute transaction, accounting, tax or legal advice.