A financial due diligence report should help a buyer decide what the target earns, how it turns profit into cash, what funding it needs and which issues remain unresolved. A large document is not necessarily a useful one. The conclusions need to be traceable to the work and relevant to the transaction.
A financial due diligence report normally brings together analysis of historical and current trading, earnings quality, working capital, cash, debt and the assumptions behind forecasts, within an agreed scope. It should explain limitations and distinguish evidenced findings from estimates or matters requiring more work.
This guide provides an illustrative report structure for a UK SME acquisition. All numerical examples are fictional. It is not a client report, an audit opinion, a complete diligence programme or a substitute for a transaction-specific engagement.
Agree the purpose before asking for the report
Start with the buyer’s decision. Are you testing an indicative price, seeking finance, investigating concerns before exclusivity or reviewing information before signing? The appropriate scope, timing and output can differ.
Define the target entities, periods, business activities and financial topics covered. Agree intended recipients and whether another party, such as a lender, requires its own engagement or reliance arrangements. Receiving a copy of a report does not automatically give a party a right to rely on it.
ICAEW’s financial due diligence guideline describes FDD as supporting informed transaction decisions through analysis of performance and risk. Its discussion of scope and reporting is a useful reference when agreeing what the buyer actually needs.
- 01Read the evidenceUnderstand scope, sources and gaps.
- 02Follow the bridgesConnect earnings, cash and equity value.
- 03Resolve the findingsAssign decisions and further work.
What sections should a financial due diligence report contain?
The following is a practical structure, not a mandatory contents list. A focused red-flag review may cover less; a complex acquisition may need additional analysis and separate specialist reports.
| Report section | Question it should answer | Useful supporting analysis |
|---|---|---|
| Executive summary | What matters to the purchase decision? | Findings, consequences, actions and unresolved matters |
| Scope and information | What was examined and what was unavailable? | Periods, entities, procedures and information sources |
| Historical and current trading | What has changed in revenue and profit? | Monthly trends, customer mix, margins and recent results |
| Quality of earnings | Which earnings are sustainable? | Reconciled adjustment schedule with evidence |
| Working capital | What operating funding does the target require? | Monthly balances, seasonality, ageing and definitions |
| Cash and debt | What is available, owed or restricted? | Cash reconciliation, facilities, obligations and classifications |
| Forecast review | What assumptions drive the buyer’s case? | Operating drivers, current trading and sensitivities |
| Findings and follow-up | What needs a decision or additional work? | Owner, evidence gap, financial effect and next action |
Avoid treating a section heading as evidence that the topic has been fully reviewed. Read the agreed scope and procedures. A report may describe a tax balance without providing a tax due diligence opinion, for example.
The executive summary should explain consequences
A useful summary does more than describe observations. It explains the issue, supporting evidence, potential financial consequence, management’s explanation and the work or decision still required. Material uncertainty should be visible near the beginning, not buried in an appendix.
Illustrative executive-summary finding
Finding: One customer generated 28% of the target’s last twelve months’ gross profit. Management expects the relationship to continue, but the next contract period is not yet committed.
Evidence: The customer schedule reconciles to management accounts. The available agreement and renewal correspondence have been provided for legal and commercial review.
Financial consequence: The base forecast assumes unchanged activity. A downside should test reduced orders, the time needed to replace them and the costs that remain during that period.
Next action: The buyer should obtain the relevant specialist assessment and consider whether to change the forecast, valuation assumptions or proposed terms. The financial finding alone does not determine the legal protection required.
This is a fictional drafting example. A real report should quantify the exposure where the available evidence supports it and explain why a precise figure cannot be given where it does not.
Historical trading: move beyond annual totals
Monthly analysis can reveal seasonality, unusual cut-off, customer losses or changes that an annual result conceals. Reconcile the management accounts to statutory results and explain any differences in accounting policies, period boundaries or entity coverage.
Break down revenue and margin using the target’s actual business model. A recruitment business needs different analysis from a manufacturer or online retailer. The report should show whether growth came from price, volume, acquisitions, mix, currency or an unusual event.
Check current trading against the information used to agree the indicative price. If several months have passed, the buyer needs to understand whether the business is still performing as expected. Explain provisional figures and the time lag in reporting rather than presenting incomplete months as final.
For sector-specific questions, see our guides to manufacturing, recruitment and e-commerce financial due diligence.
Quality of earnings: show a bridge that can be challenged
The earnings section should distinguish reported results, accounting corrections, normalisation adjustments and buyer-specific assumptions. Each proposed adjustment needs a clear description, amount, supporting records and rationale.
An item is not exceptional simply because management would prefer to exclude it. Recruitment, marketing, repairs and product development can recur, even when the exact invoice changes each year. Assess the continuing economic requirement.
Worked example: reported EBITDA to adjusted earnings
This fictional example is annual and expressed in £000. The adjustment treatments are assumptions for illustration and would require evidence in a real review.
| Earnings bridge | £000 | What the report should explain |
|---|---|---|
| Reported EBITDA | 1,000 | Reconciliation to the underlying accounts |
| Evidenced non-recurring relocation cost | +60 | Why it will not recur and whether replacement costs arise |
| Non-recurring grant income included in profit | −100 | Recognition, conditions and whether any related future benefit remains |
| Missing recurring operating cost | −40 | The cost needed to sustain the business |
| Illustrative adjusted EBITDA | 920 | £1,000,000 plus £60,000 less £100,000 less £40,000 |
The report should not present £920,000 as a guarantee of next year’s profit. It is an analysis under stated assumptions. Forecast performance depends on customers, delivery, costs and other changes after the reviewed period.
Owner costs deserve particular care. If the seller currently performs essential work, an add-back should consider an evidenced replacement cost. The companion key-person risk guide explains why replacing the founder’s contribution can affect maintainable earnings.
Working capital: explain what the business needs to operate
Analyse inventory, receivables, payables and other relevant operating balances across an appropriate period. Explain the cash cycle, seasonality and unusual movements. Do not assume the balance at the latest year end represents a normal funding requirement.
Show the calculation behind any proposed working capital target or peg. Define the included accounts and how the mechanism interacts with debt, cash and other adjustments. The treatment is negotiated and depends on the transaction documents, not solely on the label in the ledger.
A helpful report identifies overdue debtors, slow-moving stock, delayed supplier payments and customer deposits or deferred revenue that require investigation. It should explain where the same underlying matter could affect more than one analysis, so that the buyer and deal advisers can assess the effects consistently.
See the working capital peg guide for the mechanics and the working capital adjustment guide for the broader transaction context.
Cash, debt and the bridge to equity proceeds
The buyer should understand the balances, restrictions and commitments behind the cash and debt position. Request bank reconciliations, financing terms, facility availability and schedules of relevant obligations. Identify amounts that depend on settlement, consent or further investigation.
Enterprise value and equity value are different concepts. The agreed transaction mechanism determines how cash, debt and working capital affect the price paid for shares. Financial due diligence can support the inputs, but does not replace the commercial agreement or legal drafting.
Worked example: an illustrative enterprise-to-equity bridge
The figures below are fictional, in £000, and assume a cash-free, debt-free style share transaction with a separate working capital adjustment. The £5.5 million enterprise value is an assumption, not a valuation conclusion.
| Illustrative price bridge | £000 |
|---|---|
| Assumed enterprise value | 5,500 |
| Eligible cash added | +200 |
| Agreed debt and debt-like items deducted | −900 |
| Working capital shortfall under the agreed mechanism | −80 |
| Illustrative equity value | 4,720 |
The arithmetic is £5,500,000 plus £200,000 less £900,000 less £80,000. It excludes transaction fees, tax, deferred consideration, earn-outs and any other adjustments. Different deal terms can produce a different bridge.
Do not multiply a working capital shortfall by the EBITDA multiple simply because earnings are valued on that basis. Equally, do not assume every disputed balance is a price deduction. Identify the fact, consider the economic and contractual treatment and agree the relevant calculation.
Forecast review: test the route from assumptions to cash
A forecast section should identify the model version, source information and work performed. Distinguish checking calculations from assessing assumptions or providing any separately agreed assurance. Those are different tasks.
Link future sales to orders, customers, pricing, capacity or other relevant drivers. Include the people, working capital and investment needed to deliver them. A forecast that increases revenue without additional delivery resources may not describe an achievable operating plan.
Use sensitivities that reflect the target’s real exposures. These could include delayed orders, customer losses, lower utilisation, longer collections or required machinery investment. Show the effect on liquidity and financing headroom, not just EBITDA.
Acquisition financial modelling can translate diligence findings into the buyer’s own plan. Keep buyer-specific synergies separate from the target’s historical performance and identify implementation costs and timing.
A findings register turns the report into action
Agree a small number of practical priority categories. The report should explain why an item matters rather than relying on a coloured label. Distinguish a known issue, an estimate and an unresolved evidence gap.
| Finding | Decision or work needed | Responsible workstream |
|---|---|---|
| Unexplained difference between customer schedule and accounts | Reconcile before relying on the concentration analysis | Finance and target management |
| Major agreement awaiting renewal | Assess continuity and forecast consequences | Commercial, legal and finance |
| Essential machine replacement omitted from forecast | Obtain specialist assessment and update investment assumptions | Operations, engineering and finance |
| Facility subject to ownership-change consent | Confirm availability or replacement funding | Buyer, lender and legal advisers |
At signing and completion, unresolved items need an explicit treatment. After completion, relevant findings should feed the integration plan, control improvements and monitoring of the assumptions behind the purchase.
What a financial due diligence report does not establish
An FDD report is not normally an audit opinion and does not guarantee that every error, fraud or liability has been found. ICAEW’s guidance on investigative services distinguishes this work from a formal assurance conclusion. A separately requested assurance engagement requires its own terms and applicable standards.
Financial diligence also does not establish legal title, technical condition, regulatory compliance or the commercial future of every customer relationship. Coordinate the separate advisers and make the financial consequences of their findings visible.
Read the reliance and distribution provisions before sharing the report. Confidential information and transaction-specific analysis should be handled through the agreed channels. A public example such as this guide cannot be used as evidence that a real target has passed diligence.
How to scope the report you actually need
Tell the adviser about the target, proposed structure, size, available records, concerns, intended users and decision timetable. Agree the analysis, outputs, meetings and follow-up work, including what happens if the data is incomplete or the transaction changes.
For a narrower early review, compare red-flag and full financial due diligence. For fees, see what determines financial due diligence cost. Neither the document length nor a fixed number of days is a substitute for an appropriate scope.
Frequently asked questions
What should a financial due diligence report include?
Within its agreed scope, it should explain trading, earnings quality, working capital, cash, debt and relevant forecast assumptions. It should identify material findings, evidence limitations, unresolved issues and their implications for the transaction.
Is a financial due diligence report an audit?
Normally no. Financial due diligence is a scoped investigation to inform a transaction decision. It does not automatically provide an audit opinion or formal assurance conclusion, and it cannot guarantee that every issue has been found.
Can I use this example as a report template?
Use it to understand the questions and structure, not as a completed diligence report. The procedures, evidence, materiality, intended users and conclusions must be tailored to the real target and engagement.
Can a lender rely on the buyer’s report?
Not automatically. Intended recipients, permitted use and reliance terms must be agreed with the adviser. A lender may require a separate engagement, additional procedures or specific reliance arrangements.
Does Consult EFC provide financial due diligence reports?
Consult EFC can scope buy-side financial due diligence and agreed reporting around the target and buyer’s decision. Confirm the coverage, deliverables, users, limitations, timetable and fee before work starts.
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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.