Meaning and transaction use
ICAEW describes FDD as supporting informed investment or divestment decisions by enhancing knowledge of financial performance, identifying risks, testing the deal hypothesis and supporting valuation. [S1]
PwC identifies quality of earnings, assets, net working capital and cash-flow levers as core areas of financial diligence and links the analysis to pricing, structure and transaction terms. [S2]
Proposed control method: reconcile every reported adjustment to source data, classify its recurrence and transaction treatment, identify the responsible workstream and record whether it affects earnings, net debt, working capital, forecasts or disclosure.
Worked example
Illustrative deal bridge only. Assume reported EBITDA of 12.0 million, a 1.2 million non-recurring gain, 0.8 million of evidenced one-time restructuring costs and a 0.6 million annualised customer-loss adjustment. Assume enterprise value of 88.0 million, net debt of 25.0 million, a 10.0 million working-capital target and 8.5 million delivered working capital.
Scroll the table horizontally to view all columns.
| Measure | Calculation | Result |
|---|---|---|
| Normalised EBITDA | 12.0 - 1.2 + 0.8 - 0.6 | 11.0m |
| Multiple on reported EBITDA | 88.0 / 12.0 | 7.3x |
| Multiple on normalised EBITDA | 88.0 / 11.0 | 8.0x |
| Equity value before working capital | 88.0 - 25.0 | 63.0m |
| Working-capital shortfall | 10.0 - 8.5 | 1.5m |
| Illustrative adjusted equity value | 63.0 - 1.5 | 61.5m |
The illustrative adjustments reduce normalised EBITDA to 11.0 million and increase the implied earnings multiple to 8.0x. The simplified completion bridge produces 61.5 million of adjusted equity value. Actual treatment depends on the agreed definitions and evidence; the calculation is not a valuation conclusion or purchase-price recommendation.
Proposed transaction review process
Set the scope
Define the transaction, users, reporting periods, materiality, data perimeter, key hypotheses and interaction with other workstreams.
Reconcile the data
Tie management information to statutory accounts, ledgers and supporting schedules; document scope limits and unreconciled items.
Analyse deal drivers
Test earnings quality, revenue, margins, cash conversion, working capital, net debt, capital expenditure and forecasts.
Translate findings
Quantify supported findings, identify sensitivities and map each issue to valuation, financing, warranties, indemnities, completion terms or post-close action.
Evidence checklist
Financial records
Audited accounts, management accounts, trial balances, ledgers, bank records and accounting policies.
Revenue and earnings
Contracts, invoices, customer and product data, recurring-item support and management explanations.
Balance sheet and cash
Debt agreements, cash, working-capital ageing, provisions, leases, contingencies and capital-expenditure records.
Forecast and transaction bridge
Budgets, operating assumptions, enterprise value, net debt, working-capital definitions and draft purchase-agreement schedules.
Decision framework
| Situation | Proposed action |
|---|---|
| Reported earnings include unsupported adjustments | Exclude or sensitise them until source evidence and recurrence analysis are complete. |
| Net debt classification is disputed | Map the item to the agreed definition and escalate unresolved treatment into the transaction documents. |
| Working capital is seasonal | Use an appropriate historical period and operational drivers when assessing the target or peg. |
| The data does not reconcile | State the limitation, quantify the affected population where possible and avoid unsupported precision. |
Common errors to check
- Treating FDD as an audit opinion or a guarantee of future performance.
- Accepting management adjustments without source support and recurrence analysis.
- Double counting an item in earnings, net debt and working-capital bridges.
- Reporting findings without explaining their effect on value, terms, financing or post-close actions.
Translate financial findings into deal decisions
Bring the target accounts, management data, earnings adjustments, net-debt schedule, working-capital analysis and transaction bridge to an FDD review. Reconcile the evidence and map each supported issue to price, terms, financing or post-close action.
Discuss the transactionPrimary references and editorial scope
- ICAEW Corporate Finance Faculty, Financial due diligence
Purpose, scope and transaction uses of financial due diligence. Reference checked 17 September 2026. - PwC, Financial due diligence
Quality of earnings, net working capital, cash-flow analysis and transaction applications. Reference checked 17 September 2026.
General transaction education. Figures are hypothetical. The scope, procedures, reliance and adjustment treatment depend on the engagement, access, accounting framework, transaction documents and applicable accounting, tax, legal and regulatory requirements.
General business information. Obtain advice appropriate to the legal, tax, accounting and financing facts. No offer, lender commitment or transaction outcome is represented. All worked examples use expressly assumed figures. Editorial draft date: 17 September 2026.
