A financial due diligence checklist runs to a few hundred items and one group of them does most of the work. Quality of earnings is where the buyer decides what the business actually earns, and every adjustment argued there moves the price by a multiple. The other five groups mostly confirm or contradict what quality of earnings found. This page sets out the six and what each is really testing.
Quality of earnings, which is the one that matters
Which revenue recurs, which costs are genuinely one-off, what the owner takes out that a buyer would not, and what normalising all of that does to the number. Every dollar argued here moves the price by the multiple, so an adjustment worth $100,000 on a five-times deal is worth $500,000 of price.
Working capital, which is argued at close rather than now
The target and the averaging period behind it. A cash-free debt-free headline is completed by a working capital adjustment nobody agrees precisely until the mechanism is drafted, and it is the most common source of a post-signing dispute.
Revenue, customers and contracts
Concentration, renewal terms, change-of-control provisions and churn. Concentration is uncomfortable to present and is the first thing any buyer models, so a CIM that under-plays it buys three weeks of credibility and loses more than that in week four of diligence.
The three routine groups
Debt and debt-like items, tax exposures, and the historical statements with their preparation basis. Time-consuming and rarely fatal. They matter to the indemnity package and to the completion mechanism rather than to the headline the parties shook hands on.
Questions people ask about financial due diligence checklist
What is quality of earnings?
Establishing what the business actually earns after normalising one-offs and owner costs. Every dollar argued moves the price by the multiple.
Why is working capital contentious?
Because the target and its averaging period are rarely agreed precisely until the completion mechanism is drafted.
Which group is least likely to be fatal?
Tax and historical statements. They shape the indemnity package rather than the headline price.