The short answer
A financial due diligence does not check whether the bookkeeping is correct. It checks how much of the reported earnings the buyer will see again next year – and what they will have to pay on top of the purchase price. Six areas decide that: the quality of earnings, revenue cut-off, working capital, net debt, the reliability of the plan, and concentration in the business.
This is not an audit. An auditor certifies the past against accounting rules. A financial due diligence assesses whether the numbers will hold up against the price calculation. An unqualified audit opinion therefore protects against not a single deduction.
A note for readers outside Germany
Two things differ from Anglo-American practice. German mid-market targets report under HGB, not IFRS, so the starting point for the earnings bridge is a set of accounts built for creditor protection and tax, with conservative recognition and no separate management set to fall back on. And the accounts of most German companies of any size are published in the Company Register – which means a buyer can, and usually does, read three years of your figures before the first meeting.
Who runs it, and with what brief
The buyer commissions the review, normally from a transaction advisory firm or the transaction services arm of an audit firm. The brief has three purposes: secure the price, put numbers into the price mechanism, and give the buyer's lenders a basis to work from. The third is underrated – in a leveraged deal the bank reads the same report and derives its covenants from it.
Scope follows size. On smaller transactions a red-flag review looking only for deal breakers is normal. From the mid double-digit millions upwards a full review covering all six areas is standard, typically taking four to eight weeks.
Area 1: quality of earnings
The core of every review. The quality of earnings analysis asks which part of reported earnings repeats and which does not. EBITDA is adjusted for one-off, out-of-period and non-operating effects – in both directions.
Every adjustment is tested individually, with evidence. What is generally accepted: one-off effects that can be evidenced, bringing owner remuneration to market rate, and costs that demonstrably fall away after the sale. What is not: items that appear every year, adjustments without evidence, and hoped-for future savings.
The second half of the analysis is how close earnings sit to cash. EBITDA that runs well above operating cash flow for years invites questions – usually with reason.
Area 2: revenue and cut-off
The question here is whether revenue sits in the right period. The review covers the point of recognition, the treatment of prepayments, discounts, rebates and warranty provisions, and how multi-year contracts are handled. For software companies, recurring revenue, renewal rates and the split between licence, subscription and services revenue come on top.
A common finding: revenue booked shortly before the cut-off date although the service is delivered afterwards. The effect hits twice – it lowers adjusted earnings for the period and casts doubt on cut-off practice generally.
Area 3: working capital
What is reviewed is not the balance on the cut-off date but the series: how working capital has developed over the last 24 to 36 month ends, how seasonal it is, and what level the business actually needs. From that the buyer derives the target for the net working capital adjustment – an amount that feeds straight into the price.
Running working capital down shortly before the process gains nothing: the monthly series shows the intervention, and the target is set at the old level. What helps is a durable improvement with a traceable cause – the levers are set out in cutting working capital.
Area 4: net debt and debt-like items
The buyer draws up a complete list of what counts as net debt. Alongside loans and leases, that regularly includes pension obligations, unpaid bonuses and severance, holiday and overtime accruals, tax arrears from open audits, deferred capital expenditure and legal risks. Each of these reduces the price in full.
The other half concerns liquidity: pledged balances, deposits and the cash the business needs to operate are frequently not accepted as surplus.
Area 5: the plan and how well it has held
The plan is not tested for optimism but for provenance. The questions are how the assumptions were formed, which drivers sit behind them and – above all – how accurate the last three years of planning turned out to be. A plan-versus-actual bridge per year, with the variances explained, is the most credible document a seller can produce in this area.
Someone who has landed close to plan three years running negotiates from a different position than someone whose plans were regularly far out.
Area 6: concentration and dependency
The review looks at how broadly the business stands: the share of the top five customers in revenue and in contribution margin, the terms and termination rights of the main contracts, change-of-control clauses, and dependency on individual suppliers, sites or key people. High customer concentration is not a deal breaker, but it changes the structure – often via an earn-out or a larger holdback.
How the review runs
- Information request list. The reviewer sends an extensive list of documents. It is the real test: filling it promptly signals control over your own numbers.
- Data room. The documents are made available in a defined structure, following the request list rather than your own folder logic.
- Q&A rounds. Usually two to four weeks. Contradictory answers from different departments are the most common cause of lost confidence in this phase.
- Management meetings. One or two sessions in which the numbers have to be explained, not read out.
- Draft report and discussion. The draft contains the adjustments the reviewer has struck. This is where you negotiate – not later.
What can be done beforehand
The most effective preparation is to run the review on yourself first: your own earnings bridge with evidence for every adjustment, your own derivation of net debt and the working capital target, a three-year plan-versus-actual bridge, and a data room that follows the request list. Bring that, and you negotiate over your own calculation. Bring none of it, and you negotiate over the buyer's.
How much lead time this needs and in what order the work runs is set out in exit readiness. What happens to the price once the review is done is covered in purchase price mechanics.
Frequently asked questions
What exactly does a financial due diligence examine?
Six areas: the quality and repeatability of earnings, revenue cut-off, working capital across the monthly series, net debt including debt-like items, the provenance and accuracy of the plan, and concentration among customers, suppliers and key people.
How long does a financial due diligence take?
A red-flag review takes one to two weeks, a full review usually four to eight. What drives the duration is less the reviewer than the speed at which the company fills the information request list.
Does an audited annual account replace due diligence?
No. An audit opinion relates to compliance with accounting rules in the past. A financial due diligence assesses whether earnings repeat and puts numbers into the price mechanism. The two overlap only in part.
Which findings reduce the price most often?
Struck EBITDA adjustments, a working capital target set too high, debt-like items such as holiday and bonus accruals, revenue in the wrong period, and customer concentration without long-term contracts.
Who pays for the financial due diligence?
Normally the buyer, because the buyer commissions it. The seller carries the cost of their own preparation – a financial factbook or a vendor due diligence, if they decide to have one.
How do I prepare the numbers for the review?
With four documents: your own earnings bridge with evidence for every adjustment, your own derivation of net debt and the working capital target, a three-year plan-versus-actual bridge, and a data room that follows the reviewer's request list.
Read on
- Exit readiness – the twelve-month timeline and the order of work that protects the price.
- Purchase price mechanics – how enterprise value becomes the amount in the account.
- Cutting working capital – the operational levers behind the target.
- Financial due diligence as a service – how nugrow supports buyers and sellers.
- Interim CFO references – mandates including exit preparation in PE portfolios.
Sources and status
Based on the review areas customary in transaction processes in the German mid-market and private equity market, together with nugrow's own mandate experience in exit preparation and funding rounds. As of September 2026. This article does not replace legal or tax advice.
