Financial due diligence is a key part of many acquisitions, investments, management buyouts and funding transactions.

While most business owners and management teams understand why financial due diligence is important, they are often less familiar with what actually happens during the process. Understanding what to expect can help avoid delays and keep a transaction moving forward smoothly.

When does financial due diligence take place?

Financial due diligence is typically undertaken once the key terms of a transaction have been agreed and before the deal completes.

At this stage, advisers review financial information to validate assumptions, understand the key drivers of performance and identify any issues that could affect value or future prospects. The aim is to provide all parties with a clearer understanding of the business before moving forward.

What information is reviewed?

While the scope will vary depending on the transaction, a financial due diligence review will typically consider:

• Historical financial performance
• Profitability and the quality of earnings
• Cash flow generation
• Working capital requirements
• Existing debt and liabilities
• Forecasts and future performance assumptions

This helps build a clear picture of how the business has performed historically and whether future expectations appear realistic.

What are advisers looking for?

Financial due diligence is not about trying to find fault with a business. In many cases, it simply provides reassurance that performance is consistent with expectations and that the assumptions underpinning the transaction are reasonable.

However, the review may identify areas that require further investigation, such as:

• Reliance on a small number of customers
• One-off income or costs affecting profitability
• Working capital pressures
• Changes in trading performance
• Unrecorded liabilities or commitments

Identifying these matters before completion allows issues to be addressed early and helps avoid unexpected surprises later in the transaction process.

How long does the process take?

There is no standard timeframe for financial due diligence.

The duration of a review will depend on a number of factors, including the size and complexity of the business, the availability of information and the scope of the work required.

Businesses that can provide accurate and timely information often help the process run more efficiently and minimise delays.

Can the findings affect a deal?

Yes. The findings from a financial due diligence review may influence:

• Valuation discussions
• Funding arrangements
• Deal structures
• Working capital targets
• The timing of completion

In some cases, the review confirms that the original assumptions are sound. In others, it may highlight matters that require further discussion before a transaction proceeds.

How can businesses prepare for financial due diligence?

Good preparation can help make the process more efficient and reduce delays.

Businesses can support a smoother review by ensuring financial information is accurate, accessible and up to date. This may include:

• Maintaining accurate accounting records
• Producing timely management accounts
• Ensuring forecasts and budgets are supported by reliable assumptions
• Understanding the key drivers of business performance
• Identifying potential risks at an early stage
• Having supporting documentation readily available

For businesses preparing for a future sale, investment or funding transaction, taking these steps in advance can help build confidence and keep the process moving forward.

How PM+M can help

Financial due diligence can provide valuable insight at every stage of a transaction, whether you’re acquiring a business, seeking investment, completing a management buyout or preparing for a future sale.

Our Corporate Finance team works with businesses, investors, management teams and funders to help them understand the financial position of a business, identify potential risks and make informed decisions with confidence.

If you’re considering a transaction and would like to discuss how financial due diligence could support your plans, please get in touch with Bethan Greenbank-Hunter by clicking the button below.