Getting ready for diligence
Financial records and the data room
Organize your financial records, prepare for buyer questions and build a secure data room.
Overview
A clear financial record helps buyers and capital providers understand results, cash needs and risks. Start with reconciled information, explain exceptions and identify gaps before requests become urgent. This practical follow-on to the preparation overview focuses on the evidence and the data room.
Three takeaways
- Trace headline figures to supporting records. Use consistent periods and accounting policies, and explain reconciliations, revenue timing and unusual movements.
- Document each proposed EBITDA adjustment with amount, date, explanation and evidence. Separate nonrecurring costs from expenses a next owner will still incur; a proposed add-back is not automatically accepted.
- Keep one accountable request log and release information in stages through named users and role-based permissions, not unrestricted folders or ordinary outreach emails.
Considerations
- EBITDA means earnings before interest, taxes, depreciation and amortization. Discuss whether a sell-side Quality of Earnings (QoE) review is appropriate. It examines earnings and related financial issues; it does not replace all legal, tax or operational diligence.
- Explain receivables collectability, inventory obsolescence, seasonality and monthly cash needs. Keep negotiated working capital definitions distinct from debt-like items; adjustments can affect proceeds.
- Reconcile commercial evidence to financial records. Distinguish signed orders from pipeline, explain customer or supplier dependencies, and connect forecasts to operating assumptions and a downside case.
Structures and outcomes depend on the business, counterparties and definitive documents. Consult your legal, tax and accounting advisers.
Five financial workstreams
- Historical results: annual and monthly income statements, balance sheets, cash-flow information, supporting ledgers and tax records.
- Quality of Earnings (QoE): proposed adjustments with supporting evidence, consistent accounting and explanations of unusual items.
- Cash and working capital: receivables and payables aging, inventory detail, monthly trends and a cash forecast.
- Commercial evidence: revenue and margin by meaningful segment, concentration, contracts, retention and backlog.
- Forecast and capital needs: staffing, capital spending, funding uses and the effect of weaker sales or slower collections.
An initial folder structure
This is a practical starting point, not a universal diligence request list. Scope the work to the business and transaction.
- Corporate and ownership: entity records, capitalization table, shareholder rights and relevant approvals.
- Finance and tax: statements, reconciliations, adjustments, forecasts, filings and material tax issues.
- Debt and obligations: credit agreements, liens, guarantees, leases and debt-like items for review.
- Commercial and operations: major contracts, customer and supplier analysis, facilities, equipment and licenses.
- People, legal and technology: employment arrangements, incentives, disputes, insurance, intellectual property and material IT risks.
Keep one accountable request log
Record each request, internal owner, due date, status and document link. Label files by period and version, keep approved answers consistent and record unresolved items explicitly. Assign a coordinator, batch questions and maintain the monthly reporting cycle while diligence proceeds.
Share information in stages
Begin with an appropriate overview. Before detailed access, agree confidentiality and access arrangements with counsel. Use named users, role-based permissions and a controlled sharing platform. Do not circulate unrestricted folders or sensitive records through ordinary outreach emails.
Restrict personal, employee and competitively sensitive information. Consider redactions, staged disclosure or a counsel-managed clean team where appropriate. Record access and revoke it when no longer needed.
A practical readiness check
- Can every headline figure be traced to supporting records?
- Are gaps assigned to an owner with a realistic resolution date?
- Have advisers reviewed known financial, tax and legal issues?
- Is the first release consistent, permissioned and current?
Background reading
Listed for further reading, not as endorsements.
For information only. This material is not an offer or solicitation, or legal, tax or investment advice. Structures and terms depend on the business, counterparties and definitive documentation.