Financial due diligence is a critical process that helps businesses and investors assess the financial health and stability of a company. This analysis is usually performed during some type of M&A transaction and helps the buyer or seller determine the true, reliable earnings of the business (i.e., what earnings are being purchased).  The FDD process involves a comprehensive analysis of a company’s P&L, balance sheet, transactions, and operational performance. 

The goal of financial due diligence is to uncover any potential risks, red flags, or inconsistencies that may affect the company’s financial performance, future earnings, and/or valuation. This involves examining various data, such as income statements, balance sheets, cash flow statements, payroll registers, bank statements, and tax returns, to identify any issues. 

Financial due diligence also involves analyzing the company’s financial operations and accounting policies. This helps determine the reliability and accuracy of the financial information provided by the company.

The FDD process also involves conducting lengthy interviews with key management team members (typically the CFO, controller, and director of finance), reviewing contracts and agreements, and assessing the company’s market position and competitive landscape. All of this information is crucial in providing a comprehensive understanding of the company’s financial health and its potential for growth and profitability going forward.

The ultimate goal for financial due diligence is to help businesses and investors make well informed decisions about whether to proceed with a potential acquisition, investment, or partnership. It helps mitigate risks and ensures that all parties involved have a clear understanding of the financial implications and potential opportunities associated with the decision.