Financial and Business Due Diligence – when and why should you conduct it?

Due diligence is a comprehensive examination of a company aimed at thoroughly assessing its current condition and identifying both existing and potential risks associated with a planned capital transaction. It is most often performed on a company that is the target of an acquisition or equity investment. Due diligence is typically the final – but highly critical – step before entering the negotiation phase of a transaction. In this article, we focus specifically on financial and business due diligence – who should conduct it, when, and why?

What is financial and business due diligence?

Financial and business due diligence may cover a wide range of aspects depending on the nature of the investment and the profile of the target. However, the most common goals of conducting this process include:

1. In-depth understanding of the company’s current financial situation.
2. Verification of the credibility of financial and accounting documents provided during the transaction process.
3. Identification of key financial and business risks, including hidden liabilities.
4. Forecasting the company’s future financial performance.
5. Detailed understanding of the business model and core value-creating processes.
6. Supporting the investor’s decision to proceed (or not) with the investment.

In strategic (industry-specific) investments, the scope often includes evaluating strategic fit, synergy potential, and even commercial and financial assessments of customer contracts (legal aspects are typically covered in separate legal due diligence).

In short, financial and business due diligence involves deeply analyzing a company not only in terms of its financial position but also across all relevant areas that impact its current and future business performance.

The detailed areas typically covered in financial and business due diligence aim to identify both risks and opportunities. These include:

1. Financial document analysis – not limited to annual financial statements, but also including:
   
   a) detailed review of interim (monthly) financial results,
   
   b) structure and volatility of working capital (receivables, payables, inventory – including rotation, aging, structure, impairment),
   
   c) assessment of the real market value of fixed assets and investments.
   
2. Sales analysis – deep dive into customer portfolio, product/service offerings, sales structure and dynamics (by value and volume), revenue diversification, and market trends affecting future performance.
3. Cost structure analysis – multidimensional cost review to identify expenses that may have been capitalized or misclassified to inflate financial results (e.g. via accruals or capitalization of internal costs).
4. Market position analysis – review of market share, competitive advantages, and strategic alignment within the broader industry context.
5. Cash flow analysis – comparing actual cash movements to reported profits, including the cash conversion cycle and investment activity.

At Enterium, we specialize in financial and business due diligence and are happy to share our approach and insights.

Due diligence from the investor’s and target company’s perspective

As noted earlier, due diligence provides a comprehensive understanding of a company prior to investment. However, the challenges vary depending on which side of the table you’re on.

Buyers are focused on gaining clear insights into financial and business risks. Data-driven decision-making is key to successful investing. This is why investors often engage specialized advisors – to ensure the process is handled by experienced professionals.

But it’s not only investors who need support. Target companies also need to be prepared for due diligence. Many are unaware of the level of detail investors will expect during this phase. In fact, deals often fall through not at the negotiation table but during due diligence.

Why? Because no rational investor will put capital into a company with unclear or questionable financials. Investing without due diligence is like buying a pig in a poke. Many SME owners still operate without formalized analytical or controlling systems and rely on intuition or ad hoc spreadsheets that are hard to update. This lack of preparation can lead to difficulties answering investors’ questions.

That’s why it’s essential to start preparing your company months before a planned sale or capital raise. Not only does it build credibility, but it can also significantly increase your company’s market value – as we’ve seen in many successful transactions.

In short – if your company lacks financial data, internal analytics, and proper processes, you may have no convincing arguments for investors. Investors need data to mitigate risk. Without it, discussions stall – and by the time you’re ready, the investor’s focus may have shifted elsewhere.

How long does financial and business due diligence take? Is it safe?

Due diligence involves access to sensitive information, so is the process safe?

As with all business processes, there are risks – especially around misuse of confidential information – but they can be managed:

1. Share the most sensitive data at a later stage – ideally after signing a letter of intent or conditional investment agreement. This limits access to a smaller group of vetted investors.

2. Use secure virtual data rooms (VDRs) – specialized platforms make it harder to download, print, or misuse data. There is a cost involved, but it enhances protection.

3. Use legal safeguards – such as NDAs with penalty clauses and confidentiality provisions in LOIs and final agreements. Your legal team should oversee this aspect of the transaction.