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Financial Due Diligence Checklist: What to Cover on Every Deal

A financial due diligence checklist ensures no critical workstream is missed under deal pressure. Here is what every TS engagement should cover.

Datapack Team

Financial Due Diligence Checklist: What to Cover on Every Deal

Deal pressure compresses timelines and creates blind spots. A structured financial due diligence checklist prevents critical workstreams from being overlooked when teams are moving fast. It is not a substitute for judgment but a safeguard against omission.

The best checklists are living documents refined over dozens of engagements. They encode institutional knowledge about what matters, what gets missed, and where risk hides.

Phase 1: Data Acquisition and Scoping

Before analysis begins, the team must acquire data and define the scope of the engagement.

Data room review:

  • General ledger detail for the analysis period (typically 3 years plus interim)
  • Trial balances by period (monthly if available)
  • Audited financial statements and management accounts
  • Sub-ledger detail for key accounts (AR, AP, inventory, fixed assets)
  • Tax returns and tax provision workpapers
  • Debt and lease agreements
  • Related-party transaction detail
  • Organizational charts and entity structures

Scoping decisions:

  • Analysis periods (fiscal years, interim periods, LTM)
  • Entities in scope (all subsidiaries, specific segments, carve-out perimeter)
  • Key workstreams (QoE, NWC, net debt, cash flow)
  • Materiality thresholds for adjustment identification

Phase 2: Data Preparation

This phase transforms raw data into an analyzable structure.

  • Import GL data from all entities and periods
  • Validate GL totals against trial balances and financial statements
  • Map chart of accounts to standard analytical framework
  • Normalize period definitions (calendar year, fiscal year, split periods)
  • Consolidate multi-entity data with proper eliminations
  • Flag data quality issues (gaps, duplicates, unusual entries)

Data preparation is the phase most susceptible to time overruns. Automating GL mapping and normalization is the single highest-impact efficiency gain for most teams.

Phase 3: Quality of Earnings Analysis

The core analytical workstream of most engagements.

Revenue analysis:

  • Revenue by product, customer, geography, and channel
  • Revenue recognition policy assessment
  • Customer concentration analysis (top 10 and top 20 customers)
  • Recurring vs. non-recurring revenue breakdown
  • Contract and backlog analysis where applicable
  • Revenue cutoff testing at period-ends

EBITDA adjustments:

  • Non-recurring items (litigation, restructuring, one-time projects)
  • Related-party transactions at non-market terms
  • Owner compensation normalization
  • Pro forma adjustments (completed acquisitions, closed facilities)
  • Management-proposed adjustments evaluation
  • Run-rate cost savings identification

Expense analysis:

  • Personnel cost trends and headcount reconciliation
  • COGS composition and margin analysis
  • Operating expense review by category
  • Discretionary spending identification
  • Capital vs. operating expense classification

Phase 4: Balance Sheet and Working Capital

  • Net working capital analysis with monthly bridge
  • Accounts receivable aging and collectability assessment
  • Inventory analysis (aging, obsolescence, valuation method)
  • Prepaid expense and accrued liability detail review
  • Net debt calculation (all debt-like items, pension obligations, earn-outs)
  • NWC peg methodology and sensitivity analysis

Phase 5: Cash Flow Analysis

  • Cash conversion analysis (EBITDA to operating cash flow)
  • Capital expenditure breakdown (maintenance vs. growth)
  • Working capital cash flow impact
  • Non-cash items identification
  • Free cash flow calculation and trend

Phase 6: Additional Workstreams

Depending on the deal, one or more of these specialized analyses may be required:

  • Tax position review (NOLs, transfer pricing, tax risk)
  • IT systems assessment (ERP, financial reporting infrastructure)
  • Insurance coverage adequacy
  • Environmental or contingent liability exposure
  • Regulatory compliance assessment
  • Carve-out standalone cost analysis (if applicable)

Phase 7: Documentation and Delivery

  • All adjustments documented with source references
  • Audit trail complete from source data to final output
  • Draft report reviewed by manager and partner
  • Findings presentation prepared for client
  • Information request list tracked to completion
  • Final report delivered within agreed timeline

Making the Checklist Work

A checklist only works if the team uses it. Embedding it into the deal workflow rather than treating it as a separate document increases adoption. The most effective teams integrate checklist tracking into their project management approach so progress is visible at each stage.

For teams running multiple concurrent deals, a standardized checklist also serves as a capacity planning tool. It makes the scope of each engagement visible and comparable, helping managers allocate resources across the portfolio.