Glossary · Diligence
Financial due diligence
Definition
Financial due diligence checks whether a company's reported numbers hold up. Accountants rebuild earnings from the ledgers, strip out one-off items, test working capital and debt, and look at how cash really moves through the business. The output is often a quality of earnings report that the buyer uses to set or defend the price.
Where financial due diligence comes up
On this site, in our guides and in the conversations we've written up.
Video · RSM South Africa What operational due diligence checks that financial and legal DD miss Financial due diligence covers the historical financial statements, performance, assets and liabilities, cash flows and synergies. 
Video · Wharton School Due diligence on a roll-up: lessons from a luxury optical deal He calls unaudited financials at a privately held target a major red flag that needs very good accountants on the financial due diligence. Related terms
Quality of earnings An accountant's report on how much of a company's profit is real, recurring and likely to last. EBITDA Earnings before interest, tax, depreciation and amortisation: the profit figure most deals are priced on. Net working capital Current assets minus current liabilities: the cash tied up in running the business day to day. Due diligence The investigation a buyer, investor or lender runs on a company before committing: its finances, contracts, legal position and operations. Commercial due diligence A test of the target's market, customers, competitors and growth plan, to see whether the business case holds. Legal due diligence The lawyers' review of a company: ownership, key contracts, disputes, licences, employment terms and intellectual property. Operational due diligence Diligence on how the business actually runs: processes, systems, supply chain, sites and people. Red flag report A short diligence report that lists only the serious issues, instead of describing everything that was reviewed.