In a sale, merger or investment, understanding a company’s financial position in detail before signing is essential to making better-informed decisions. The buyer needs to know whether the figures presented reflect the reality of the business, and the seller needs information that supports the valuation of their company. That financial examination is financial due diligence, one of the reviews that may form part of a wider due diligence process ahead of a corporate transaction or investment.
Financial due diligence is the detailed analysis of a company’s financial position, assets and liabilities carried out before a sale, merger or investment, in order to assess the quality of its financial information, determine its net debt position and identify risks that could affect the valuation, the price or the transaction itself.
What is financial due diligence?
The term due diligence literally means due care: the duty to examine carefully whatever you are about to decide on. Applied to finance, it involves reviewing the annual accounts, audit reports, management accounts and capital structure of the target company to confirm that its performance is as stated. It goes beyond checking that the numbers add up: it seeks to understand why the business makes or loses money and whether that trend is sustainable.
It is usually commissioned by the buyer or investor and carried out by a specialist team, internal or external, with experience in financial analysis and corporate transactions. In many deals, the review begins once the initial framework of the negotiation has been agreed and access to the company’s information has been granted, often after signing heads of terms or a letter of intent (LOI) and the corresponding confidentiality undertakings.
What it is for: from purchase price to hidden risks
The ultimate aim is to make an informed decision and, very often, to adjust the terms of the deal. In practice, this analysis serves to:
- Verify the figures. Confirm that the revenue, margins and profits reported by the seller match the accounting reality.
- Uncover hidden risks and liabilities. Identify unrecorded debts, contingencies, liquidity issues or non-recurring income and items that may distort the reading of the results.
- Adjust the price. Provide relevant information to support the valuation and negotiate the financial terms of the deal.
- Measure cash generation. Analyse the relationship between EBITDA, working capital requirements, capital expenditure and the business’s actual ability to generate cash.
- Support the financing analysis. In certain transactions, investors or lenders may require this type of review before committing funds.
What financial due diligence covers
The scope is agreed case by case, but there is a core set of areas that is almost always reviewed. Each one answers a specific question about the health of the business:
| Area reviewed | What it reveals |
| Quality of earnings and EBITDA | Strips out exceptional or non-recurring items from EBITDA in order to approximate normalised operating performance and assess its sustainability. |
| Net debt | Analyses financial debt, available cash and debt-like items to determine the net debt position relevant to the transaction. |
| Operating working capital | Analyses operating items such as receivables, payables and inventory, as well as their historical trends, to determine the business’s normal working capital requirements. |
| Cash flow | Measures the ability to generate cash on a recurring basis, beyond the accounting result. |
| Assets and liabilities | Checks that assets are correctly valued and that there are no obligations missing from the balance sheet. |
| Financial projections | Tests the reasonableness of the financial projections, the assumptions used and their consistency with the historical performance of the business. |
Financial due diligence should be distinguished from a statutory audit. While an audit aims to express an opinion on whether the financial statements give a true and fair view in accordance with the applicable accounting framework, financial due diligence responds to the needs of a specific transaction and analyses the factors that may affect the valuation, the price and the terms of the deal.
How it works: the stages of the process
Although every transaction has its own pace, the work is usually organised in three stages.
1. Planning and scope
The parties involved in the review and the advisory team define what will be analysed, in how much depth, for which periods and within what timeframe. A well-defined scope avoids both blind spots and unnecessary work (and cost).
2. Fieldwork and data room
This is the analysis stage. Documentation is centralised in a data room, an electronic repository that allows sensitive information to be shared in an orderly and confidential way. Using that material, the adviser examines the business, its historical results, its assets and liabilities, its cash flows and its projections.
3. Findings report
The work concludes with a document summarising the findings and their impact. Its conclusions can be used to confirm or revise the initial valuation and to negotiate, where appropriate, price adjustments, warranties, indemnities or other contractual protection mechanisms.
The financial due diligence report
The financial due diligence report is the deliverable that brings the whole analysis together and makes it usable at the negotiating table. A typical structure includes:
- Executive summary. The most relevant facts and risks, written for the decision-makers
- Proposed adjustments. The adjustments identified to EBITDA, net debt or working capital and their possible impact on the valuation or on the deal price.
- Detailed analysis and appendices. The development of each area, with the supporting documentation behind the conclusions.
These adjustments can carry significant weight in the subsequent negotiation: identifying additional debt, debt-like items or EBITDA adjustments can affect the valuation and the price finally agreed.
Financial due diligence and other reviews
The financial review is only one perspective on the company. In a full transaction it is usually coordinated in parallel with other specialist reviews:
| Type | What it reviews |
| Financial | Financial position, debt, working capital and cash generation. |
| Legal | Corporate, contractual and regulatory position of the company. |
| Tax | Tax compliance and contingencies with the tax authorities; in Andorra, in accordance with the Principality’s tax framework. |
| Employment | Workforce, contracts, salaries and social security obligations. |
| Commercial | Market, customers, competition and sustainability of sales. |
| Technology | Systems, security and digital maturity of the business. |
| Real estate | Legal, planning and technical status of the properties involved. |
Analysing these areas together provides a more complete view of the transaction. Coordination between the financial, tax, corporate and legal teams is particularly important when a single finding may have implications across several areas.
Vendor due diligence: when the seller takes the lead
It does not always start with the buyer. In vendor due diligence, it is the company itself that commissions the analysis before going to market. Getting ahead can help identify relevant issues before the sale process begins, improve the quality of the information provided to potential buyers, reduce issues during the review and strengthen the seller’s position in the negotiation.
Preparing it properly means organising the documentation, carrying out a prior internal review and, where appropriate, considering possible corrective measures or a corporate restructuring ahead of the transaction.
Specific features of financial due diligence in Andorra
When the transaction has a link to Andorra (a company being acquired in the Principality, a resident investor buying abroad or a group reorganising its structure), the financial analysis intersects with tax planning and local regulations. The Andorran tax framework and the specific features of its company law mean that the same finding can have a different impact from the one it would have in other jurisdictions, so the figures should be interpreted in light of the Principality’s tax system.
In this context, it is also important to check whether the company is subject to a statutory audit and to review the available reports. In Andorra, the law sets out certain cases in which public limited companies (SA) and private limited companies (SL) must have their annual accounts audited, based on parameters such as total assets, turnover or number of employees.
At Augé we approach this type of transaction from a multidisciplinary perspective, coordinating the financial analysis with the tax, corporate and legal implications of the deal. This combined view allows findings to be assessed not only from an economic standpoint, but also in relation to the structure of the transaction, the warranties and the risks that may be carried over into the contract. The final decision is therefore based on a financial and legal reading consistent with the Andorran environment.
Frequently asked questions
How long does financial due diligence take?
It depends on the size and complexity of the company, the agreed scope and, above all, the availability and quality of the information. A well-organised data room and a clearly defined scope can speed up the process considerably.
What determines the cost?
The cost varies according to the volume of information to be reviewed, the number of areas included and the depth of the analysis: the larger the company, the more financial years to examine and the more specialists involved, the higher the fee.
Who pays, the buyer or the seller?
The cost is usually borne by whoever commissions the work: the buyer or investor in acquisition due diligence, and the seller in the case of vendor due diligence. In any case, the terms can be agreed between the parties depending on the structure of the transaction.
How does it differ from a statutory audit?
A statutory audit aims to provide a professional opinion on whether the financial statements give a true and fair view in accordance with the applicable regulatory framework. Financial due diligence, by contrast, is a review linked to a specific transaction, whose scope is defined according to the parties’ needs. It focuses in particular on aspects that may affect the valuation and the negotiation, such as quality of earnings, net debt, working capital and cash generation.
Is financial due diligence mandatory?
As a general rule, financial due diligence is not a mandatory legal requirement. It is carried out to analyse and manage the risk of a transaction and can be particularly relevant in acquisitions, mergers or investor entries. Likewise, certain lenders or investors may require a financial review as part of their approval process.
