Financial due diligence grounded in the documents
Financial due diligence helps a buyer understand whether reported earnings, cash generation and obligations support the proposed acquisition. Acquisitions gives your team a permissioned data room, AI review of financials and contracts, and an exportable red flag report. Use the findings to direct your accountant's questions and connect the financial story to the evidence behind it.
Learn what the reported profit leaves unanswered
An income statement describes a period under a set of accounting policies. It does not by itself tell you what cash reaches the business, what expenses recur under your ownership or which obligations transfer at closing. A buyer needs those answers before treating reported earnings as a basis for price or financing.
Start by defining the entities and activities within the acquisition. Ask how the seller prepares the accounts, which periods are comparable and whether any operations sit outside the transaction. Management schedules can be useful, but reconcile them to the underlying records. A clear explanation of the reporting basis is often more valuable than another spreadsheet containing the same totals.
Request records that can be reconciled
Collect income statements, balance sheets, cash flow information, general ledger detail and the relevant supporting schedules. Request customer revenue detail, receivables and payables aging, debt agreements and explanations for related-party activity. Ask for the periods needed to understand seasonality and changes in the operating model, rather than imposing an arbitrary history on every target.
Organize the package in the virtual data room. Separate accounting records from forecasts and label the entity and reporting period. If financial statements are consolidated, ask how the target's results are isolated. If cash records and reported revenue differ, request a reconciliation that explains timing, deferred revenue, refunds and other relevant items.
- Identify the accounting basis and any changes between periods.
- Reconcile revenue schedules to reported revenue and the ledger.
- Examine unusual journal entries and material movements in balances.
- Request evidence for adjustments rather than accepting a description alone.
Challenge adjustments without assuming every adjustment is wrong
A seller may present adjusted earnings that exclude owner expenses, transaction costs or unusual events. Some exclusions may be reasonable for understanding historical operations. Others may remove costs the buyer still needs to incur. The question is whether the adjustment has evidence and whether its treatment fits the proposed ownership model.
Ask who performs the owner's work after closing, what that role costs and whether the expense already appears elsewhere. Consider both favorable and unfavorable adjustments. A new maintenance requirement or an under-resourced finance function can matter as much as an expense the seller wants to remove. The quality of earnings report guide explains how a bridge from reported results can keep those judgments visible.
Read the balance sheet alongside earnings
Profitable sales do not necessarily turn into cash on the same timetable. Receivables may be overdue, inventory may be slow moving and annual customer payments may fund services the buyer delivers after closing. These facts affect funding needs even when the income statement appears consistent.
Review receivables aging alongside collections and customer disputes. Examine payables for overdue balances or expenses recorded outside the normal cycle. Understand deferred revenue and customer prepayments before deciding how they enter the transaction's working capital and debt definitions. Those definitions belong in the negotiated agreement and require professional input. The room holds the schedules and questions so your advisors can evaluate them together.
Test financial assumptions against signed terms
Revenue concentration matters more when a major customer can terminate, reduce volume or renegotiate at renewal. A supplier cost assumption depends on the contract as well as the latest invoice. Financing obligations may carry conditions triggered by ownership changes. Financial and legal workstreams should compare their findings before the buyer finalizes the model.
Acquisitions reviews contracts and financials for potential red flags. Use AI contract review software to identify clauses that deserve closer reading, then have counsel interpret the actual language. A finding is a prompt to investigate. It is not confirmation that revenue disappears or that a liability must receive a particular accounting treatment.
Turn a flagged item into a documented question
Upload documents, organize them by workstream and set permissions per folder. Give financial advisors the records they need while restricting employee or commercially sensitive material to appropriate participants. External accountants, lawyers and sellers invited for view and upload only do not need a paid seat.
Review the AI red flag list against the source records. Team and Fund include Q&A and custom checklists for follow-up. Ask for the reconciliation, signed amendment or explanation that resolves the specific issue. Your reviewer decides whether the answer is sufficient and how any remaining uncertainty affects the investment case. See M&A due diligence for connecting this work with the broader acquisition review.
Export a report that supports the financial discussion
Export the red flag report and use it alongside your accountant's work and the acquisition model. Before circulation, explain the scope, missing records and unresolved questions. Distinguish a management assertion from a reconciliation you have examined, and an AI observation from an advisor's conclusion.
Acquisitions does not issue an audit opinion, certify earnings or replace financial, tax or legal advisors. The report helps you organize the documents and review priorities. A complete investment decision also considers information outside those files, including management interviews, customer context and professional assessment of the proposed transaction terms.
Plan around the documents and collaboration required
Deal includes a room, internal seats, document analyses and report export. Team adds capacity, custom checklists, Q&A, watermarking and a view audit log. Fund expands capacity and adds SSO, a portfolio view and priority support. See Pricing for exact allowances and charges.
Annual billing is the default, with the year paid together at half the monthly subscription rate when expressed per month. Analyses count per billing period, and deleting documents does not restore usage. Consider the volume of financial records and agreements you expect to analyze, rather than choosing only by storage allowance. The due diligence software guide helps map those needs to a review workflow.
FAQ
No. Acquisition diligence focuses on questions relevant to the buyer and transaction. An audit has a different scope and professional framework. Acquisitions provides document review support.
AI can highlight potential issues in the supplied documents. Your accountant evaluates adjustments, accounting treatment and the evidence needed to support a conclusion.
No. Missing information, incomplete records and matters outside the document review can still create risk. Assess the scope and unresolved questions with your advisors.
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