Financial diligence rebuilds your earnings from source data. It is not an audit and it is not a valuation: it is an attempt to answer one question, which is how much this business actually earns on a normalised basis, because that number multiplied by something is the price.
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Financial due diligence, M&A or a private sale: what they rebuild
Revenue by month and by customer, tested against invoices and bank receipts. Gross margin by product or service line. Operating costs separated into recurring and one off. Your compensation replaced with a market salary where relevant. Working capital month by month. Then a normalised earnings figure with every adjustment listed and reasoned.
How add backs are challenged
Each one has to be non recurring, non operational or genuinely personal, and each has to be evidenced. A vehicle used mostly for personal purposes is a defensible add back with a log and an invoice; the same claim without documents is removed. Sellers lose more value here than anywhere else in diligence, and it is entirely preventable with a folder.
Preparing for it: a financial due diligence checklist for the seller
Reconcile management accounts to tax returns and explain the differences in writing before you are asked. Build the add back schedule with a document per line. Produce a monthly revenue and margin file. Identify the customers who are more than a small share of revenue and be ready to talk about each. That preparation is a week of work and it routinely protects a large part of the price.
Questions people ask about financial due diligence
Is financial diligence the same as an audit?
No. An audit tests whether the statements comply with a framework; financial diligence tests what the business really earns and whether that continues.
Who does M&A financial due diligence?
An accounting firm engaged by the buyer, or by the seller in a vendor exercise. Small deals sometimes see the buyer's own accountant rather than a specialist team.
Can I see the financial due diligence report?
You will see the adjustments they propose. The report itself belongs to whoever commissioned it.