Financial Due Diligence (FDD)

Definition

FDD goes beyond the statutory accounts. The buyer (or their advisor) reconstructs normalised EBITDA, tests recurring versus one-off items (the quality of earnings), maps the true net debt and debt-like items, and analyses normal working capital for the peg.

The outcome drives the price and the SPA: findings lead to price adjustments (price chips), specific indemnities, or changes to the working-capital peg. A well-prepared seller often commissions vendor due diligence to get ahead of surprises and speed up the process.

When it matters

FDD is where deals die or prices collapse. Sellers whose numbers are not in order: messy normalisations, unexplained margins, weak record-keeping: lose negotiating power exactly when it counts.

Frequently asked

What is the difference between FDD and an audit?

An audit tests whether the accounts are true and fair under accounting rules; FDD assesses whether the figures are economically defensible to a buyer: normalised earnings, debt, working capital and forecasts. Different question, different lens.

How do I prepare for FDD as a seller?

Set up a clean data room, document your EBITDA normalisations, explain margin swings, and consider vendor due diligence. The less the buyer has to dig, the fewer price chips and the faster the deal.

Who pays for financial due diligence?

Usually the buyer for their own FDD. With vendor due diligence the seller pays for an independent report shared with interested buyers, which speeds up the process for all parties.