When a company plans to acquire or merge with another, one of the most important steps in the process is to take a deep dive into the target company’s financial health and history and that’s exactly what financial due diligence is all about.

Imagine you’re about to buy your dream house. Everything looks great from the outside, the neighborhood is nice, and the price seems fair. but you wouldn’t sign the papers without a proper inspection. That inspection might reveal structural issues that could cost you a fortune. Financial due diligence and how to do it plays the same role in business transactions. It helps uncover hidden financial risks before the deal is done, ensuring you make a well-informed decision

What is Financial Due Diligence?

Financial due diligence means checking how a business is doing with its money. It reviews and analyses a company’s financial records to assess its actual performance, sustainability of earnings, and potential risks. The goal is to validate the accuracy of the financial information and to understand how the business might perform in the future.

The main purpose is to ensure the numbers are true. This helps people who want to buy the business or invest in it determine whether it’s a good idea or whether there are any risks.

What Documents Are Needed for Financial Due Diligence?

To perform financial Due diligence, you need these documents:

• Audit Reports
• Balance sheet (shows what the company owns and owes)
• Profit and loss statements and cash flow reports
• Fixed asset registers 
• Forecasts and budgets
• Debt schedules
• Customer and vendor contracts

These documents help verify if the financial data are true and correct

What Is Financial Due Diligence vs. a Financial Audit?

Financial due diligence and financial audit are different. 

A Financial Audit verifies whether the company’s financial reports, such as the income statement, balance sheet, and cash flow, are correct and confirms that the financial statements are prepared in accordance with accounting standards.

Financial Due Diligence goes deeper. It analyses the numbers and examines how the company makes money, whether the profits can last, and whether there are any hidden problems or risks. This helps buyers or investors understand how the company is doing and if it has a strong future.

How Long Does Financial Due Diligence Take?

For small to mid-sized businesses, it usually takes 45 to 60 days. This gives the buyer time to check the company’s money matters properly. 

For larger or more complex businesses, the process can extend to 60 to 180 days.

It can take longer if the seller is not ready with all the papers. Having complete, well-organized documentation can speed up the process and enhance buyer confidence.

Financial Due Diligence Checklist

This is a simple checklist to help you prepare when buying or selling a business;

1. Income Statement (Last 5 Years)

• Assess the revenue and profitability trends and its sustainability. 
• Look into the spending of the company. 
• Check Customer Concentration. Is revenue heavily reliant on one or two clients? 
• Flag any exceptional and non-recurring events. For example, if the company closes for a strike, is it something that happens once or can happen again?

2. Balance Sheets (Last 5 Years)

• Evaluate asset liquidity and fair market value. 
• Look at long-term assets like land or patents. These might be worth extra money.
• Compare assets with the liabilities. 
• Examine debt levels and compare them with industry benchmarks.

3. Cash Flow (Last 5 Years)

• Check if the company has a positive cash flow. If it’s almost zero, find out why. 
• See if the cash comes from operating or investing activities. 
• Conduct Stress tests. Imagine if cash drops by 30% (like if a big customer leaves) — can the company still pay its loan interest?

4. Financial Ratios – Health Check

Look at these numbers to understand the company’s overall performance:

• Operating Margin – profit from regular business
• Gross Margin – money left after paying for making or buying products
• Interest Coverage Ratio – can it pay interest on loans?
• Net Profit Margin – overall profit from sales
• Current Ratio – can it pay short-term bills
• Debt Ratio – how much the company owes
• Debt-to-Equity Ratio – how much it owes compared to what it owns
• Asset Turnover – how much sales it makes using what it owns
• Return on Assets – how well it uses its things to make a profit
• Return on Equity – how much profit goes to the owners

Compare these metrics with those of industry standards to evaluate relative performance.

5. Management Discussion and Analysis (MD&A)

Read the Accompanying Notes to Financial Statements to understand the financial statements better. They can explain why profits or sales went up or down. These notes can also help you ask more questions if something looks odd.

6. Tax Check (Tax Due Diligence)

• Check if the company has paid all its taxes. 
• Look at their tax papers to see if everything is correct. This helps you find any tax problems before buying the company. A checklist can help you not miss anything.

Why Financial Due Diligence Matters

If you’re planning to buy or invest in a business, the best step you can take is to start with solid financial due diligence. It gives you a clear picture of the company’s true financial health and helps you avoid costly surprises later. But you don’t have to do it alone — JAKS is here to guide you every step of the way.

JAKS is a consulting company in Dubai that helps businesses with their business finances and accounts. We do bookkeeping, VAT filing, payroll, and monthly financial reporting. Your data is safe with us. We make finance easy and worry-free. Need Due Diligence services in Dubai?  Call us at +971 503372712 or email [email protected] — we’re happy to help!