By Bill Anderson, FCCA, Chief Executive Officer — Assetica, Dubai, UAE
Definition: Financial due diligence is an independent examination of a target company’s numbers before a transaction, to confirm that the financial picture the seller presents is real. It centres on quality of earnings, whether the profit is maintainable; net debt and working capital, what actually changes the final price; cash-flow quality; and the risks a buyer is inheriting. The output is a findings report that informs the offer, the deal structure and the decision to proceed. Assetica prepares them for buyers and investors across the UAE.
Quality of earnings, stripping out one-off, owner-related and non-cash items to reach the maintainable profit a buyer is acquiring. Net debt and working capital, defining the debt-like items and a normalised working-capital target so the completion true-up is agreed on evidence rather than argued after signing. Red flags and deal risk, including customer and supplier concentration, related-party dealings, aggressive revenue recognition and undisclosed liabilities. And deal-price support, tying every finding directly to value.
Earnings: a quality-of-earnings analysis normalising profit to its true run-rate. Balance sheet: net debt, debt-like items, provisions and off-balance-sheet exposures. Working capital: a normalised target so the completion adjustment is fair and pre-agreed. Cash flow: how well reported profit converts to cash and the real funding needs. Risk: concentration, related-party terms, revenue recognition and contingent liabilities.
Financial due diligence pairs naturally with an M&A and transaction valuation, and sits alongside Assetica’s core business valuation in Dubai practice and our due diligence service.
What is financial due diligence?
Financial due diligence is an independent examination of a target company's numbers before a transaction, to confirm that the financial picture the seller presents is real. It centres on quality of earnings (is the profit maintainable), net debt and working capital (what actually changes the final price), cash-flow quality, and the risks a buyer is inheriting. The output is a findings report that informs the offer, the deal structure and the decision to proceed. Assetica prepares them for buyers and investors across the UAE.
What is the difference between due diligence and a valuation?
A valuation tells you what a business is worth; due diligence tells you whether the numbers behind that worth can be trusted. Diligence tests the profit, the debt, the working capital and the risks, and its findings often change the valuation, for example by revealing that reported earnings are not maintainable or that undisclosed liabilities reduce equity value. On many deals the two run together: the diligence findings feed the valuation, and the valuation frames the offer.
What does a quality of earnings analysis cover?
It normalises reported profit to find the maintainable, repeatable earnings a buyer is actually acquiring. That means stripping out one-off gains and costs, owner-related expenses that will not continue, non-cash and accounting items, and any aggressive revenue recognition, then testing how well the remaining profit converts to cash. Quality of earnings is usually the most important single finding in a financial diligence exercise, because the whole price often rests on a multiple of that number.
Do I need due diligence for a small acquisition?
Even on a smaller deal, the risks that hurt buyers most, overstated earnings, hidden debt, customer concentration and a working-capital shortfall at completion, are exactly the ones a focused diligence exercise surfaces before you commit. The scope is scaled to the deal, so a smaller acquisition gets a proportionate review concentrated on the areas most likely to change the price or the decision.
How long does financial due diligence take?
Typically five to seven business days from receipt of the data room and management information, with two to three day expedited delivery available where a deal is time-sensitive. The scope is set at the scoping call so the timeline matches the size and complexity of the target.