Financial due diligence for buyers produces findings that need decisions. A report is useful when the buyer can distinguish a supported fact, an estimate, an unresolved question and a matter for another adviser. This guide explains how to read and act on the output.
For the engagement scope, see buy-side financial due diligence. Use the separate guides on when to commission the review and preparing the target information request for those stages.
Read the scope before the executive summary
Confirm the target, periods, data sources, work performed, exclusions and intended users. A conclusion about a specified period is not automatically a conclusion about later trading. A red-flag review should not be read as if it examined every aspect of the business.
Look for limits caused by missing records or restricted management access. The report should explain what could not be investigated and how that affects interpretation. Silence in an excluded area is not a positive conclusion.
Separate findings by their financial effect
| Finding area | What the buyer needs to understand |
|---|---|
| Earnings quality | Whether the proposed maintainable earnings are supported and what adjustments depend on judgement. |
| Revenue and margin | How customer concentration, recognition, costs and current trading affect the investment case. |
| Working capital | The cash needed to operate the business and the proposed transaction definitions. |
| Cash and debt | Which balances may affect consideration under the agreed mechanism. |
| Forecast | The assumptions, sensitivities and evidence behind future performance. |
Read an earnings bridge critically
An EBITDA bridge starts with the reported measure and shows proposed adjustments. Ask for the evidence, period and rationale for each item. A cost being inconvenient or described as exceptional does not establish that a buyer can ignore it after acquisition.
Consider replacement costs, recurring patterns and consistency with the forecast. If the forecast already assumes a benefit, check whether the valuation analysis counts it again. Document where buyer and seller views remain different.
Illustrative finding, not an automatic price cut
Suppose the seller adds back £50,000 of costs as non-recurring, but records suggest the same type of cost is expected next year. The buyer should investigate the evidence and the proposed earnings definition. Any valuation or price effect depends on the negotiated method and deal terms; the finding alone does not create a contractual deduction.
Avoid double counting completion items
A balance should be analysed using the proposed definitions of cash, debt, debt-like items and working capital. The parties may negotiate different treatments. Check the financial schedules against the legal drafting rather than applying a generic classification without regard to the transaction.
For related context, see working capital peg calculations and completion accounts versus locked box. These concepts do not replace reviewing the actual agreement.
Turn the findings into an action log
- State the finding and link it to the supporting evidence.
- Record the amount, range or uncertainty and why it matters.
- Assign the follow-up question to management or the relevant adviser.
- Identify the decision affected and the date needed.
- Record the response, resolution and remaining limitation.
The buyer should receive a clear explanation of the material open issues before the next commitment. A long list of minor observations should not obscure a short list of questions that could change the acquisition case.
Frequently asked questions
How should a buyer read a financial due diligence report?
Start with the scope and limitations, then read material findings alongside the supporting schedules and unresolved questions. Distinguish confirmed evidence from estimates and understand how each finding could affect the transaction.
Is every EBITDA add-back acceptable?
No. Assess whether the item is evidenced, genuinely non-recurring and consistent with the proposed maintainable earnings measure. A seller’s adjustment is a proposal that the buyer may challenge.
Does a finding automatically reduce the price?
No. The commercial effect depends on the evidence, negotiations and transaction documents. An earnings issue, working capital item and debt-like item can have different effects. Avoid applying the same issue more than once.
What if the target cannot provide the requested evidence?
Record the limitation, materiality and consequence for the buyer’s decision. Options may include further investigation, a changed scope, a revised timetable or discussing contractual implications with the legal adviser. Missing evidence is not proof that a balance is correct.
Who decides whether to proceed?
The buyer and its authorised decision-makers make that decision, considering the financial findings and other advice. Financial due diligence informs judgement; it does not provide a guarantee or make the acquisition decision for management.
Discuss a buyer-focused review
Consult EFC can agree a financial review that connects findings with the acquisition decision. Tell us the target, stage, intended outputs and deadline. View buy-side due diligence services.
About the author: Kishen Patel ACA, founder of Consult EFC. View the ICAEW member profile.
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Over 12 years across Big Four audit, Investment Banking, and corporate advisory. Kish works with SaaS founders, tech companies, and ambitious UK SMEs from £1M to £50M in revenue on fundraising, valuations, exit planning, and financial strategy. ICAEW regulated. Big Four trained. Based in London.