Figures do not lie – but incomplete figures can become a risk in Financial Due Diligence (FDD). Audited financial statements prepared in accordance with the German Commercial Code (Handelsgesetzbuch, HGB) do not answer every buyer question. Those who prepare their financial history, EBITDA and reporting periods clearly and comprehensibly at an early stage strengthen trust, their negotiating position and the orderly progress of the sale process.
Financial Due Diligence – – key points at a glance
- Inconsistent accruals and deferrals, missing monthly financial statements and undocumented non-recurring effects frequently lead to queries and purchase price discussions.
- Normalised EBITDA shows the sustainable operating earnings capacity and often forms a key basis for business valuation.
- With international buyers, differences between HGB and IFRS must be reconciled in a comprehensible manner.
- Preparation 12 to 24 months before the planned exit provides time to improve data quality and reporting.
Why your own financial data can become a deal risk
Imagine this: you have operated successfully for years, your business is growing, and the figures are sound – then a buyer arrives with its FDD team. Three weeks later, a report is on the table that adjusts your EBITDA downwards by 15%, identifies three material accounting errors and calls the working-capital normalisation into question. The purchase price? Suddenly, it is open for discussion again.
This is not a worst-case scenario. It is everyday reality in mid-market M&A processes.
Many mid-market companies keep their accounts in accordance with HGB – correctly, in compliance with the law and certified by their tax adviser. While this is entirely sufficient in day-to-day operations, it becomes a bottleneck in an M&A context. Buyers, investors and their advisers think in different categories: they do not analyse the tax balance sheet, but the economic substance of the business. This is precisely where misunderstandings begin.
The three most common problem areas in Financial Due Diligence
The same weaknesses repeatedly arise in Financial Due Diligence processes involving mid-market companies:
- Missing or inconsistent accruals and deferrals – revenue is recognised too early or too late, provisions are understated or entirely absent.
- Non-normalised EBITDA – one-off income or costs have not been adjusted for, distorting the sustainable earnings value.
- Lack of comparability across the review period – changes in the chart of accounts, changes in posting practices or shareholder services that have never been properly separated turn three years of financial history into a puzzle.
What “normalised EBITDA” really means – and why it is so often missing
In an M&A context, EBITDA is the key valuation metric. Buyers multiply it by an industry multiple in order to derive an indicative purchase price. That sounds simple – but it is not.
Meaningful, normalised EBITDA adjusts operating results for all non-recurring or non-operating items:
- Advisory fees for the sale process itself
- Shareholder salaries that are not in line with market levels
- Extraordinary income from the sale of property or similar one-off events
- Covid support payments and short-time working allowance
- One-off restructuring expenses
The problem is that, in practice, very few mid-market companies have ever prepared this normalisation. There is no consistent documentation. When the buyer’s FDD team examines this for the first time, the outcome is often surprising – and rarely in the seller’s favour.
Non-normalised EBITDA is not a minor issue: at a 6x multiple, every downward adjustment of EUR 100,000 results in a purchase price reduction of EUR 600,000.
The IFRS trap: when international buyers encounter HGB accounts
A structural communication problem arises particularly where the potential buyer is an international company, a private equity fund or a strategic investor reporting under IFRS. The reference frameworks are simply different.
HGB is governed by the principle of prudence and tax-law influences. Under IFRS, economic substance takes centre stage: leases are accounted for differently (IFRS 16), revenue recognition follows different rules (IFRS 15), and provisions must be measured according to different criteria. A buyer viewing HGB financial statements through an IFRS lens will inevitably ask questions – and expect answers for which a typical mid-market accounting function is not prepared.
This leads to delays in the process, renegotiations and, in the worst case, a loss of trust on the buyer’s side – not because the seller has concealed anything, but because the figures simply have not been prepared in the expected format.
Typical accounting weaknesses that become visible in Financial Due Diligence
| Weakness | Typical impact in FDD |
| Missing monthly financial statements | Delays in the process; the buyer doubts the quality of reporting |
| Shareholder accounts / related parties | Need for EBITDA normalisation; possible purchase price reduction |
| Inconsistent cost allocation | Comparability across the review periods is called into question |
| Missing or insufficient provisions | Increase in identified liabilities; possible purchase price reduction |
| Unclear revenue cut-off | Uncertainty regarding sustainable revenues; potentially a higher earn-out component |
What this means specifically for the business value
A buyer who identifies these weaknesses during FDD has several options – none of them favourable for the seller:
- Purchase price reduction through a lower EBITDA base after normalisation.
- Higher earn-out component: a larger portion of the purchase price is made contingent on performance because the historical earnings capacity cannot be clearly evidenced.
- Increased representations, warranties and indemnities in the SPA (Share Purchase Agreement), which may continue to burden the seller for years after closing.
- Process delays: every unresolved question costs time; where there are competing bidders, this may be decisive to the purchase decision.
- Termination: in rare but real cases, fundamental doubts about data quality lead a buyer to end the process.
When should a mid-market company make its financial history “DD-ready”?
The honest answer is: as early as possible – and not only once the sale process is already under way. Ideally, preparation should begin 12 to 24 months before the planned exit. This may sound like a long time, but it is realistic if accounting inconsistencies are to be corrected, monthly financial statements established and EBITDA bridges prepared.
Even if no sale is planned, there are benefits to maintaining financial history at due diligence quality. Discussions with banks become easier, and shareholders and advisory boards receive robust reports. If a strategic prospective buyer unexpectedly comes knocking, you are prepared.
Without preparation, the first Financial Due Diligence becomes a box of surprises – usually to the seller’s disadvantage.
Well prepared with an FDD readiness process
As part of a structured FDD readiness process, we analyse typical weaknesses that repeatedly arise in due diligence processes involving mid-market companies – before the buyer’s team finds them.
Phase 1:
Assessment
Analysis of the financial statements for the past three years, identifying inconsistencies, accrual and deferral issues, and potential normalisation items.
Phase 2:
EBITDA-Normalisation
Preparation of a clear EBITDA bridge with comprehensible documentation of all adjustments – in the form that a buyer’s FDD team will later expect to see.
Phase 3: Remedying weaknesses
Specific recommendations for improving accounting quality, establishing management reporting and documenting related-party transactions.
Phase 4: Vendor Due Diligence (optional)
Preparation of a vendor due diligence report that can be provided to all qualified bidders during the process – saving time, building trust and reducing information asymmetry in the seller’s favour.
The result:
When the buyer’s FDD team begins its work, there are no more unpleasant surprises – or at least significantly fewer. Those who understand their own figures better than the other side’s FDD team negotiate on equal terms.
Conclusion: Good preparation strengthens your negotiating position
Robust financial data are not merely a reporting matter in a business sale. They influence trust, process speed, purchase price arguments and contractual arrangements. Those who know their figures before the buyer analyses them negotiate from a stronger position.
Have your financial history reviewed from a buyer’s perspective!
Are you planning an exit, or would you like to know how robust your financial history is? In a 15-minute consultation call, I will give you an initial, honest assessment – without obligation and without a sales pitch.
Your ACCONSIS contact
Bastian Regenhardt
Master of Science
Certified public accountant
Authorised signatory of ACCONSIS
Service phone
+49 89 547143
Email
b.regenhardt@acconsis.de
Frequently asked questions about Financial Due Diligence
What does a Financial Due Diligence typically review in mid-market companies?
An FDD analyses historical profitability, typically over three years, the quality of the financial statements, EBITDA normalisation, working capital, net debt and the sustainability of the business model from a financial perspective. Its focus is on risks that may affect the purchase price or the purchase price structure.
Does a mid-market company need to understand IFRS if it prepares accounts under HGB?
Not necessarily – but it should understand how a buyer with an IFRS background will interpret its figures. Those who understand the key differences, for example in lease accounting, provisions and revenue recognition, can address potential questions proactively and avoid surprises during the process.
What is normalised EBITDA, and why is it so important?
Normalised EBITDA adjusts operating profit for non-recurring and non-operating items in order to show sustainable earnings capacity. It is the most important metric for determining the purchase price – a variance of EUR 100,000 can make a difference of several hundred thousand euros to the purchase price at customary industry multiples.
How long does an accounting review for FDD preparation take?
This depends heavily on the starting condition of the accounting records. In our experience, a mid-market company should allow four to eight weeks for a comprehensive assessment and EBITDA normalisation, provided that the underlying data are accessible and structured.
Do I need a Vendor Due Diligence, or is disclosing the data sufficient?
A Vendor DD is not mandatory, but it is a strategically sound move. It gives the seller control over how its own figures are presented, accelerates the process and reduces the likelihood of unexpected purchase price reductions at the final stage.
