What investors look for in
financial due diligence

Financial due diligence is where transactions are won or lost. A business that looks compelling at the term sheet stage can see its valuation chipped — or a deal collapse entirely — because the numbers don't hold up under scrutiny. And in most cases, the problems that surface weren't secrets. They were gaps that hadn't been addressed before the process started.

This article sets out what investors and acquirers actually look for, where the most common problems arise, and what a business can do to prepare — ideally before anyone has signed an NDA.

What financial due diligence is actually trying to establish

The purpose of financial due diligence is not to audit the accounts. It is to answer four questions that the buyer or investor cannot take on trust:

• Is the revenue real and repeatable? Revenue must be substantiated — not just reported. Investors will look at customer-level data, contract terms, renewal rates, and payment history to form a view on quality, not just quantity.
• What does the business actually earn? Reported profit and normalised EBITDA are rarely the same number. DD separates the underlying earnings power of the business from one-off costs, owner benefits, and accounting treatments that distort the picture.
• What is the working capital position? Cash generation matters as much as profit. A business that earns well on paper but absorbs cash through debtors, stock, or creditor management is a different proposition from one that generates cash freely.
• What liabilities are not on the balance sheet? Contingent liabilities, earn-out obligations, personal guarantees, deferred tax, unresolved HMRC positions, and off-balance-sheet commitments all affect value — and all are common findings.

Revenue quality: where most deals get complicated

Investors consistently spend the majority of their DD time on revenue. The questions they are asking go well beyond the top-line number.

Is revenue truly recurring?

For SaaS and subscription businesses, the distinction between ARR and revenue is fundamental. Investors will test whether contracted ARR reconciles to billed revenue, how churn has been calculated, and whether expansion revenue has been correctly separated from new business. One-time professional services or implementation fees presented as part of ARR is one of the most common findings — and one of the most damaging to valuation multiples.

Customer concentration

A business where the top three customers represent more than 40–50% of revenue is carrying material concentration risk. Most institutional buyers will discount for this, and some will require it to be addressed before completion. The question is not just the percentage — it is whether those relationships are contractually protected, how long they have been in place, and what the renewal history looks like.

Revenue recognition

The point at which revenue is recognised matters enormously for businesses with long-term contracts, milestone payments, or deferred income. Buyers will expect revenue recognition to comply with IFRS 15 (or US GAAP ASC 606 for US-facing businesses) and will rebuild the P&L on a consistent basis if they find inconsistencies between periods.

Normalised EBITDA: the number that drives valuation

EBITDA is the primary valuation anchor in most SME and growth company transactions. The normalised figure — adjusted for one-off costs, non-arm's-length transactions, and owner-specific expenses — is what the multiple gets applied to. Getting this number right matters.

Common adjustments that sellers put forward, and that buyers scrutinise in detail, include:

• Owner remuneration above market rate — where a founder has paid themselves significantly above what a replacement CEO would cost, the excess is typically added back. But it needs to be defensible.
• Non-recurring professional fees — legal costs, restructuring costs, or one-off consultancy fees. Each must be evidenced as genuinely non-recurring and not likely to recur in the hands of the buyer.
• Rent charged at below-market rates — where the business occupies premises owned by a related party at a below-market rent, the P&L will be adjusted to reflect a market rent.
• LTIP and share-based charges — non-cash charges that are added back to EBITDA but require careful consideration of the ongoing obligations they represent.

Each add-back must be traceable to a specific line in the accounts, supported by documentation, and withstand the question: "Could this recur?" Any add-back that cannot be properly substantiated will either be rejected or discounted — reducing the normalised EBITDA and, with it, the enterprise value.

Working capital: often overlooked, always important

Working capital — the net of debtors, creditors, stock, and accruals — is a standard completion mechanism in any transaction. The buyer and seller agree a normalised working capital level, and the price adjusts if the actual level at completion differs from the target.

What founders often underestimate is how much the working capital position can move the economics of a deal. A business that completes with £300k less working capital than the agreed target takes a £300k hit to proceeds — regardless of what the enterprise value says.

Investors will build a detailed working capital model during DD, looking at debtor days, creditor payment terms, aged debtors, and any seasonal patterns. Businesses with slow collections, disputed invoices, or payables stretched beyond normal terms will face scrutiny — and potentially a lower working capital peg.

What the data room needs to contain

A well-structured financial data room reduces DD friction and signals to investors that the business is professionally run. The financial section should include, at minimum:

• Three years of statutory accounts (signed and filed)
• Three years of monthly management accounts, reconciled to statutory
• Current year management accounts to the most recent month
• The financial model, with assumptions clearly documented
• A detailed customer schedule (revenue by customer, contract dates, renewal status)
• Payroll and headcount schedule by role and cost
• A schedule of non-recurring items for each year presented
• Capital expenditure schedule and asset register
• Details of all debt facilities, HP agreements, and financial liabilities
• Cap table and any outstanding options or warrants
• Material contracts (top customers, key suppliers, leases)

Missing documents slow the process and create the impression that the business is disorganised or has something to hide. Neither outcome helps valuation.

Where deals get chipped — and how to avoid it

Price chips most commonly arise from four sources:

Revenue adjustments. One-off revenues, disputed recognition, or churn that is higher than reported will each result in a lower normalised revenue figure — and a lower multiple applied to it.

EBITDA add-backs rejected. If the seller's normalised EBITDA cannot be substantiated, the buyer will apply their own view of the sustainable earnings. On a 6x multiple, a £50k difference in normalised EBITDA is a £300k difference in enterprise value.

Working capital shortfall. If the business completes with less working capital than the agreed peg, the difference is deducted from proceeds — typically pound for pound.

Identified liabilities. Unprovisioned warranty claims, outstanding HMRC matters, employment disputes, or lease termination costs will either be priced in, escrowed, or indemnified. None of them increase the price.

The pattern in all of these is the same: surprises that arise during DD disadvantage the seller. The same issues, identified and addressed in advance, give the seller the opportunity to explain them, quantify them accurately, and control the narrative.

How to prepare before the process starts

The businesses that get through financial DD fastest — and at the best price — are not the ones with no problems. They are the ones that know their own numbers well enough to answer every question quickly and credibly.

Preparation, twelve to eighteen months before a process, should include:

• A reconciliation of management accounts to statutory accounts for each year
• A documented schedule of all normalisation adjustments, with supporting evidence
• A customer-level revenue analysis with contract terms and renewal history
• A working capital model built from the last 12–24 months of data
• A review of all financial liabilities — HP, loans, deferred tax, contingent items
• A clean cap table with all options, warrants, and employee share schemes documented

This is precisely the work a fractional CFO should be doing in the twelve months before a transaction — not the week before heads of terms are signed.

A note on Vendor Due Diligence

One approach that is increasingly common in structured sale processes is for the seller to commission their own financial due diligence report in advance — a Vendor Due Diligence (VDD) report. This is produced by an independent firm, shared with prospective buyers, and gives the seller control over the initial financial narrative.

The advantages are material: a well-prepared VDD accelerates the buyer's process, reduces the scope of separate buyer DD, and surfaces issues that the seller can address or explain before they become negotiating points. In competitive processes, it can also create time pressure on buyers who would otherwise use DD as a delay tactic.

For businesses with revenue above £5M or enterprise values above £5M, VDD is worth serious consideration. The cost is real — typically £20k–£60k depending on scope and firm — but so is the value of controlling the narrative in a sale process.

The role of the CFO in a due diligence process

Whether the process is a fundraise or a sale, the CFO — internal or fractional — is central to its success. They are responsible for the quality of the data room, the integrity of the normalisation adjustments, the working capital model, and the management of the DD process itself.

For founder-led businesses without an internal CFO, engaging fractional CFO support before a process begins is one of the highest-return investments available. The cost of that support is a fraction of the value at risk if a price chip occurs — or a deal falls apart entirely.