What Is Financial Due Diligence?
Financial due diligence (FDD) is the process of independently verifying a target company’s financial statements, trends, and quality of earnings before a merger, acquisition, or investment closes. A deal team reviews the target’s general ledger, trial balances, and management accounts to confirm reported earnings are accurate, identify one-off or non-recurring items, and flag risks that could affect valuation or deal terms.
Who Performs It
FDD is typically run by the buy-side or sell-side’s accounting firm, transaction advisory services (TAS) practice, or an in-house corporate development team, working alongside deal counsel and the bankers running the process.
What It Covers
- Quality of earnings (QoE): normalizing EBITDA for one-off items, owner add-backs, and accounting policy choices
- Working capital analysis: establishing a normalized working capital target
- Revenue and customer concentration analysis
- Debt-like items and net debt reconciliation
- Key accounting policies and any red flags in how they’ve been applied
What the Output Looks Like
The deliverable is usually a report (or “FDD report”) built on top of a databook, the structured set of financial exhibits behind the findings, plus a list of findings, proposed purchase-price adjustments, and management questions the deal team still needs answered before signing.
How Long It Takes
For a mid-market deal, traditional FDD typically runs 2 to 3 weeks from data receipt to draft report. Most of that time is spent on manual data extraction and schedule-building rather than analysis itself, which is the specific bottleneck AI-assisted FDD tools target. See how AI automates financial due diligence.
