What is Financial Due Diligence?
Nexa Consultancy | Startup & Finance Glossary
Financial Due Diligence is the process through which an investor or acquirer investigates the financial health and performance of a target company. The goal is to verify the accuracy of the company's financial statements and to identify any potential risks, liabilities, or inconsistencies.
Base Term for Startups: This is a critical and intense phase of any funding round. A startup must be prepared to provide detailed historical financials, bank statements, tax filings, and support for all the metrics presented in their pitch deck. Being well-prepared for financial diligence is a sign of a mature and well-run company. Use our Due Diligence Checklist to prepare.
Key Areas of Focus: Key areas include quality of earnings, accuracy of revenue recognition, proof of key SaaS metrics (MRR, churn), working capital analysis, and verification of tax compliance.
Base Term Example: During financial diligence, an investor's accounting firm will conduct a deep dive into a startup's books, asking for bank statements to confirm revenue and invoices to verify expenses.