Due diligence is the comprehensive investigation and analysis of a business conducted before a major transaction — such as investment, acquisition, or lending. Financial due diligence examines the company's financial health, quality of earnings, working capital normalisation, and financial projections. FP&A teams are central to both conducting and responding to due diligence.
In Depth
Due diligence is the "trust but verify" phase of any significant transaction. Investors and acquirers conduct it to confirm that the business is what it appears to be and to identify risks that may affect the transaction price or structure.
Financial due diligence typically covers: quality of earnings analysis (separating recurring from non-recurring items), revenue sustainability and customer concentration, normalised working capital requirements, net debt and debt-like items, capital expenditure requirements, tax compliance and exposures, management accounts accuracy versus audited accounts, and financial projection reasonableness.
FP&A teams play dual roles. When responding to due diligence (sell-side), they prepare the data room, answer financial questions, explain variances and trends, and defend the financial model. When conducting due diligence (buy-side), they analyse the target's financials, assess the reasonableness of projections, and identify risks and opportunities.
Common due diligence findings that affect deal pricing include: one-off revenue boosts that inflate run-rate earnings, related-party transactions at non-market rates, deferred maintenance CapEx that will require future spending, unrecorded liabilities or contingencies, and aggressive accounting policies.
For UK transactions, due diligence also examines: Companies House filing compliance, HMRC tax status (any open inquiries or disputes), employment law compliance (IR35, holiday pay, pension auto-enrolment), and intellectual property ownership.
Real-World Example
A UK SaaS company undergoes financial due diligence for a Series B. The FP&A team prepares a data room with 3 years of management accounts, monthly MRR bridges, cohort retention analysis, customer contract summaries, headcount plans, and the financial model. The investor's due diligence firm (a Big Four team) identifies that £200K of reported ARR comes from a single customer on a month-to-month contract — flagging concentration risk. The FP&A team provides context: the customer has been active for 18 months and is in advanced discussions for a 2-year commitment.
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