Financial Due Diligence Checklist Template

Phase 1: Scope, Data Request & Basis of Preparation

Owned by the deal lead. The answers recorded here decide which later phases and tasks appear.

• Record the deal basics — target, headline price or multiple, price mechanism (completion accounts or locked box), the target’s tax jurisdiction (US, UK or both) and whether a vendor due diligence report exists
• Agree the scope and periods with the deal lead — commonly two to three financial years, the year to date and the trailing twelve months, by entity; note anything out of scope
• Set the materiality threshold for adjustments and findings — so time goes on items that can move the price
• Issue the financial information request list — trial balances, management accounts, bank statements, aged ledgers, tax returns and the budget
• Record the reporting framework and any policy changes — US GAAP, IFRS or FRS 102; audited, reviewed or unaudited; changes in revenue, capitalisation or lease policies across the periods
• Reconcile monthly trial balances to the annual accounts and management accounts — every later analysis builds on this tie-out
• Read the vendor report and agree reliance terms — shown only when a vendor report exists; note its data cut-off, scope limits and the adjustments you do not accept

Phase 2: Quality of Earnings & Normalised EBITDA

Owned by the financial due diligence lead. Every adjustment carries its evidence as an attachment.

• Build the EBITDA bridge — reported, then management-adjusted, then diligence-adjusted, each adjustment on its own line with a reference
• Test each management adjustment against evidence — reject unsupported run-rate savings and synergies the buyer, not the seller, will create
• Remove non-recurring and out-of-period items — litigation settlements, restructuring, one-off grants, prior-year corrections booked in the current year
• Normalise owner and related-party costs — owner salaries and related-party rent restated to what the business will pay after completion
• Label pro forma adjustments separately — acquisitions annualised, closed sites removed, new contracts; keep them apart from diligence adjustments
• Check accounting policies for earnings quality — revenue recognition, capitalised development costs and lease accounting applied consistently across every period
• Compare adjusted EBITDA with operating cash flow — low cash conversion is the most common sign that earnings are not what they seem

Phase 3: Revenue, Customers & Proof of Cash

• Analyse revenue by customer, product, geography and channel — with top-ten concentration and any customer above the threshold you set in Phase 1
• Split revenue growth into price and volume — and gross margin by product, so the forecast can be tested later
• For recurring revenue, reconcile ARR or MRR to recognised revenue — and analyse churn and retention by cohort
• Test cut-off and credit notes around period ends — bill-and-hold, side letters and credits raised after the year end
• Review deferred and accrued income against contract terms — it feeds both working capital and the debt-like items debate
• Perform a proof of cash for sample months — bank receipts and payments reconciled to recorded revenue and costs

Phase 4: Working Capital, Net Debt & Debt-Like Items

The two peg tasks are shown only when the price mechanism is completion accounts.

• Agree the definition of net working capital — trade items only; cash, borrowings, tax and debt-like items sit elsewhere so nothing is counted twice
• Analyse monthly net working capital over 12 to 24 months — normalised for one-offs, with seasonality and any stretching of creditors before the sale
• Propose the working capital peg — commonly an average of normalised monthly balances over the trailing twelve months, adjusted for seasonality and growth
• Draft the completion accounts policies with legal counsel — the hierarchy of specific policies, consistency with past accounts, then GAAP
• Build the net debt schedule — borrowings, accrued interest, finance leases, overdrafts, and cash that is trapped or held for customers
• List debt-like items for negotiation — unpaid prior-period tax, accrued bonuses, deferred consideration, pension deficits, dilapidations, aged payables and, by agreement, deferred revenue
• Split capital expenditure into maintenance and growth — record any deferred maintenance as a debt-like item or a price point

Phase 5: Locked Box Balance Sheet & Leakage

Shown only when the price mechanism is a locked box. There is no post-completion true-up, so the work happens before signing.

• Assess the locked box balance sheet — its date, whether it was audited or reviewed, and how far it sits from the expected signing date
• Test cash, debt and working capital at the locked box date — the price is fixed on these balances
• Identify leakage since the locked box date — dividends, management fees, bonuses, related-party payments and seller transaction costs paid by the target
• Agree the permitted leakage schedule with legal counsel — ordinary salaries and items in the budget the buyer has seen
• Review bank movements from the locked box date to signing — every payment to a seller or connected party is explained

Phase 6: Tax Exposures

US and UK tasks are shown from the jurisdiction answer in Phase 1. Specialist tax advisers usually own this phase.

• Map open tax years and enquiries — filed returns, payments and any audits or enquiries in progress
• US: review state nexus — sales tax registration under economic nexus rules since the 2018 Wayfair decision, and state income tax filings
• US: review federal positions — research cost treatment under sections 174 and 174A, entity classification and any elections that shape the deal structure
• UK: review corporation tax, VAT and PAYE — including off-payroll working (IR35) status decisions for contractors and any research and development claims
• Quantify each exposure and propose its treatment — a specific indemnity, a debt-like deduction, an escrow or a warranty and insurance point