Financial due diligence (FDD) is the systematic review of a company’s financial statements, metrics, and forecasts by the buyer’s or investor’s advisors to validate earnings quality and deal economics before closing.

How it works

In M&A and growth equity, accounting firms lead FDD: analyze revenue recognition, customer concentration, churn, gross margin bridges, capex vs opex, and normalized EBITDA. They compare management projections to historical performance and industry benchmarks. Output includes a quality-of-earnings report flagging one-time items, related-party expenses, and working capital seasonality.

Findings feed purchase price adjustments, cash-free debt-free closing mechanisms, and escrow holdbacks. Venture rounds use lighter FDD than PE buyouts but late-stage investors increasingly request similar rigor on ARR definitions and cohort data.

FDD runs parallel to legal diligence and commercial due diligence on market and customers.

Why it matters

• Founders: Build a data room with reconciled GAAP or management accounts, cohort exports, and documented adjustments before LOI—surprises in week six kill trust.
• Investors: FDD protects against overpaying and informs covenant design in structured deals.

Common mistake

Presenting investor metrics that diverge from accounting records without reconciliation. FDD teams treat unexplained gaps as red flags and discount value.

Related ideas

See CDD (commercial due diligence), legal diligence, quality of earnings, and data room.