Financial Due Diligence

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Financial Due Diligence

Acquisitions require clarity regarding profitability, cash flow, and financial structures. Robust financial due diligence creates transparency, supports well-informed purchase price decisions, and lays the foundation for sound contract drafting and a smooth transition after closing – even under conditions of limited data availability and tight deadlines.

WTS Advisory provides independent, transaction-oriented financial due diligence, either as a standalone service or as an integral part of comprehensive transaction advisory services – ranging from buy-side advisory to support with SPA negotiations and closing accounts. In addition, upon request, we can integrate financial due diligence with tax and legal due diligence, thereby ensuring – as part of a one-stop approach –that insights from various disciplines are consistently incorporated into the transaction structure and contract drafting.

Our Financial Due Diligence Services

Buy Side Financial Due Diligence

We establish a robust foundation for the purchase price, deal structure, and contractual safeguards. Our buy-side financial due diligence provides transparent and decision-oriented analyses of sustainable profitability, asset structure, cash flow generation, and net debt, presented in a clearly structured report and data book.

Our Focus Areas:

Quality of Earnings analysis to determine sustainable earnings
Cash flow, working capital, and cash conversion analysis
Net debt analysis, including cash and debt-like items
Identification of purchase price-related risks and value drivers as a basis for the SPA and negotiations

Red Flag Financial Due Diligence

We provide a rapid and robust initial assessment of financial risks in the early stages of a transaction. Our Red Flag Financial Due Diligence quickly establishes a focused basis for decision-making to evaluate whether a transaction should proceed, including an assessment of potential deal implications and a clear “go” or “no-go” decision-making framework.

Our Focus Areas:

Identification of material financial risks with potential implications for the purchase price or the deal
Identification of potential deal breakers and critical issue areas
Focus on core issues relevant to decision-making within a limited timeframe
Reliable basis for a well-founded “go” or “no-go” decision

Sell Side Financial Due Diligence/Vendor Due Diligence

We prepare your company specifically for a structured and efficient sales process. Our sell-side financial due diligence identifies potential risks early on and enables proactive management of the entire transaction process, supported by the derivation of key purchase price implications and the preparation of critical negotiation topics.

Our Focus Areas:

Identification and analysis of key financial value drivers
Identification of potential risks and deal breakers before approaching investors
Validation of historical financial metrics and derivation of sustainable earnings metrics
Support in preparing for buy-side due diligence requirements
Guidance through the Q&A process and substantive support for management

Financial Fact Book

We prepare a structured financial fact book that provides investors with consistent, understandable, and decision-relevant financial information and significantly reduces the number of follow-up questions during the transaction process, presenting all key value drivers and factors relevant to the purchase price in a clear and investor-oriented manner.

Our Focus Areas:

Preparation of a Financial Fact Book, including a presentation of earnings quality, cash flow, and net debt
Structured presentation of historical financial information
Consistent presentation of KPIs and operating metrics
Validation of the business plan and comparison with historical performance and the equity story
Anticipation and structured response to typical financial due diligence questions

Financial SPA Advice

We ensure that financial findings from the due diligence process are accurately reflected in the purchase agreement in a manner that stands up to negotiation. Our Financial SPA Advice translates the results of working capital, net debt, and cash flow analyses into clear purchase price mechanisms and closing definitions. This reduces room for interpretation between buyer and seller and ensures that economic objectives are contractually safeguarded.

Our Focus Areas:

Derivation of working capital targets and purchase price adjustment mechanisms
Analysis of working capital trends and definition of normalized levels
Definition of cash, debt, and distinction between cash and debt-like items
Support with closing accounts and locked-box mechanisms
Support with financial aspects of SPA negotiations in coordination with legal counsel

Main Contact

Dr. Rainer Doll

Partner Advisory

Munich

+49 89 28646 2716

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Main Contact

Christian Hörmann

Partner Advisory

Munich

+49 89 28646 1886

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Main Contact

Thomas Kuehl

Partner Advisory

Deal Advisor

Frankfurt

+49 (0) 151 55977264

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Good to Know

Average time frame for due diligence

The time required for financial due diligence depends on the transaction structure, data availability, and time pressure. A red flag financial due diligence can typically be completed within a few days, while a full-scope financial due diligence usually takes several weeks. Upon request, we coordinate financial, tax, and legal due diligence in collaboration with specialized WTS teams or external partners, thereby ensuring a consistent assessment of all issues relevant to the purchase price. An initial consultation will quickly reveal whether and to what extent a financial due diligence is appropriate for your transaction.

Frequently Asked Questions About Financial Due Diligence

What exactly is examined as part of a financial due diligence process?

The financial due diligence process focuses on sustainable profitability (quality of earnings), the asset and debt structure (net debt), working capital, and cash flow generation. It assesses the robustness of the reported results and identifies any one-time or non-recurring items. The goal is to establish a transparent, decision-oriented basis for determining the purchase price and structuring the contract.

What is an EBITDA adjustment, and why is it relevant to the purchase price?

Adjustments normalize the reported earnings by eliminating one-time, non-period-specific, or non-market-based effects, such as adjusted executive compensation, extraordinary items, or private cost allocations. Normalized EBITDA reflects sustainable earnings power and is therefore often used as the direct basis for determining the purchase price. The scope and quality of the adjustments play a decisive role in determining the negotiating position.

What are the differences between buy-side, sell-side, and red flag due diligence?

Buy-side due diligence evaluates the target company from the buyer’s perspective and provides the basis for the purchase price and the SPA. Sell-side or vendor due diligence actively prepares the company for the sale process and anticipates critical issues. Red flag DD is a rapid initial assessment conducted in the early stages and provides a focused “go-or-no-go” basis within a limited timeframe.

How long does financial due diligence take, and what factors determine the amount of work involved?

A Red Flag Due Diligence can be completed in a few days, while a Full Scope Due Diligence typically takes several weeks. The effort required depends on the transaction structure, data availability, and the urgency of the decision. Even with limited data, reliable conclusions can be drawn, provided that assumptions and gaps are clearly disclosed.

Why is the distinction between net debt and working capital so crucial?

The classification of individual items as net debt or working capital directly affects the purchase price, as net debt items typically reduce equity value on a one-to-one basis. Debt-like items—such as provisions, accrued liabilities, or pending investments—are often a point of contention. A clear, defensible classification prevents room for interpretation between the buyer and seller and safeguards the purchase price mechanics in the SPA.

Further topics you could be interested in

Valuation

Financial Modeling

Buy-Side M&A

Distressed Situations & Restructuring Services

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