Financial Due Diligence
Also known as: FDD, Finance Diligence
Definition
Financial due diligence evaluates the quality, sustainability, and presentation of a company's financial results. It covers quality of earnings, revenue recognition, working capital, debt-like items, cash conversion, forecast reliability, and accounting policy.
Financial diligence answers what the company earned and how reliable that number is. It does not, by itself, prove the company can keep earning it after close.
That is why technology deals need financial and technical diligence connected. Revenue recognition can look clean while the platform carrying the revenue is fragile.
Related terms
- Net Working Capital — Current operating assets minus current operating liabilities. In M&A, the working-capital peg can materially change cash delivered at close.
- Quality of Earnings (QoE) — An independent forensic analysis of a target's reported earnings, normalizing for one-time items, accounting choices, and revenue-recognition decisions. The diligence step that determines real EBITDA.
- Revenue Recognition — The accounting policy that determines when contracted customer value becomes recognized revenue.
Where this gets applied
- Unit Economics — CAC payback, NRR, gross margin by segment, cohort analysis, paid-on-bookings vs. paid-on-cash.
- Financial Infrastructure — ARR waterfalls, deferred-revenue rules, board-pack standardization, FP&A architecture.
- Exit Readiness — Pre-LOI cleanup. Financial reporting normalization, contract hygiene, IP assignment review, customer-concentration mitigation.