How the Due Diligence Process Works

What the review looks for

Financial due diligence answers three questions. First, quality of earnings: how much of the reported profit is repeatable and how much is one-off. Second, net debt: which items behave like debt without appearing as debt on the balance sheet (severance provisions, deferred payments, shareholder loans). Third, working capital: how much cash the business ties up in its normal cycle.

All three feed directly into the price formula. Due diligence is therefore not a compliance check but the technical groundwork of the price negotiation.

How the process runs and how long it takes

A typical process starts once a letter of intent is signed and exclusivity is granted. The buyer issues an information request list, the seller sets up a data room, questions flow in writing and deepen through management sessions.

On a mid-market transaction, financial and commercial review usually completes in four to eight weeks. What extends the timetable is almost never the review itself; it is scattered data on the seller's side, dependence on a single person, or slow responses.

The findings that come up most often

A recurring set of findings shows up in practice: personal costs of the owner and family carried by the company; intra-group transactions that cannot be compared to market terms; revenue concentrated in a handful of customers; critical commercial relationships with no contract or an expired one; impairment in inventory and receivables recognised late.

Few of these end a transaction on their own. What ends transactions is not the finding itself but its arrival as a surprise in the middle of the process.

How findings translate into price

A finding enters the price in one of three ways. If it is a permanent reduction in profit it is multiplied by the multiple and reduces value several times over. If it is a one-off liability it is added to net debt and reduces value one for one. If it is uncertain it is handled through a protection mechanism: part of the consideration is escrowed or covered by an indemnity.

For a seller this distinction is critical. Of two findings of the same size, one may cost a single unit of value and the other six.

Preparation on the sell side

What smooths the process most is the seller running its own review before the buyer does. Sell-side preparation means documenting normalisation adjustments in advance, settling the definition of net debt, and putting weak points on the table before they become surprises.

This preparation raises the price less than it prevents the price from falling mid-process. When a buyer discovers something itself, it uses that discovery not only to cut the price but as evidence that trust was misplaced.