Answers / Financial Due Diligence
Financial Due Diligence (FDD) Interview Questions
Quality of earnings, net working capital, net debt, and deal-breaker analysis — the questions Big-4 Transaction Services teams actually ask.
60 questions · model answers · common mistakes
FDD Fundamentals
- How does FDD differ from an audit?
- Why is FDD important in an M&A transaction?
- Walk me through a typical FDD engagement.
- What is the 'quality of net assets' and why is it important in FDD? Give an example of an issue you might uncover.
- How would you approach analyzing the EBITDA bridge of a target company with a complex business model, including multiple segments and significant one-time items? What specific line items would you focus on, and how would you defend your adjustments to the bridge?
- What is the primary purpose of a data request list in financial due diligence, and how would you prioritize the requests?
- Why must you reconcile management accounts to the audited statutory financials early in an FDD, and what do gaps tell you?
- What is the difference between a databook and the FDD report, and why do you tie every report number back to the databook?
Quality of Earnings
- Give me 3 examples of QoE adjustments.
- A company shows 30% revenue growth. What would you investigate?
- How would you handle a situation where management proposes a large add-back?
- How do you analyze revenue quality for a SaaS company?
- How do you handle a company with significant related-party transactions?
- What metrics would you use to assess the quality of earnings for a company with a high proportion of recurring revenue, and how would you use these metrics to identify potential risks or areas for improvement?
- How would you handle a situation where the target company's management proposes a large add-back to EBITDA, and what factors would you consider when evaluating the justification for the add-back?
- How would you assess the quality of a company's financial reporting, and what metrics or indicators would you use to identify potential issues or areas for improvement?
- What is the difference between an LTM adjustment and a run-rate adjustment in QoE, and why is run-rate the more dangerous one to accept?
- How do you analyze a gross-to-net revenue bridge, and what quality issues hide in the deductions?
- Why does the classification of items 'above' versus 'below' the EBITDA line matter so much in QoE, and where do disputes arise?
- How would you use cohort and retention analysis to assess the durability of a subscription business's revenue in QoE?
- How do you assess customer profitability and margin quality when a target reports only blended gross margin?
- Walk me through performing a proof of cash and what it actually proves.
- How do you separate organic from acquisitive (inorganic) growth in a target's revenue, and why does it matter to a buyer?
- How do you estimate maintenance capex when the target doesn't separately disclose it, and why does it matter for EBITDA quality?
- How would you test revenue cut-off at period ends, and what manipulations does it catch?
- How do you assess whether a target's bad-debt provision is adequate, and what does an aged receivables analysis reveal?
- How do you evaluate inventory provisioning for slow-moving and obsolete stock in a target?
Net Debt & NWC
- Why is the NWC peg important?
- A seller argues that accrued bonuses are part of NWC, not debt-like. How do you respond?
- How do you handle factoring/receivables financing in FDD?
- How would you normalize NWC for a seasonal business?
- How do you handle IFRS 16 lease liabilities in a CFDF deal?
- Explain the concept of 'debt-like items' in Net Debt calculation. Why is a tax liability from a recent acquisition considered debt-like, but a routine tax payable is not?
- Explain the concept of 'normalized net working capital' for a seasonal business. How would you calculate the peg in a completion accounts mechanism?
- What is the correct treatment of deferred revenue in net working capital for a completion accounts mechanism?
- How do you set the net-working-capital peg for a seasonal business, and what's the trap with a simple 12-month average?
- What is the concept of 'leakage' in a locked-box transaction, and how would you identify and quantify potential leakage in the context of financial due diligence?
- Describe a situation where you would consider using a 'collar' mechanism in a completion accounts process. How would you determine the appropriate range for the collar?
- How do you treat accrued but unpaid capex (capital creditors) in the net debt and working capital analysis?
- How do you treat restricted or trapped cash in the net debt calculation of a cash-free debt-free deal?
- How do uncertain tax positions and tax-due-diligence findings get reflected in the net-debt / price analysis?
Advanced & Practical
- What Excel skills are most important for FDD?
- Walk me through how you'd start analyzing a company you know nothing about.
- What are the key differences between FDD in the US and Germany/DACH?
- How do you handle a carve-out in FDD?
- What is a Vendor Due Diligence (VDD) report and how is it different?
- How do you assess the quality of a company's financial reporting?
- What is an earn-out and how does FDD support it?
- How do you present a red flag to the client without causing panic?
- What metrics would you look at first when you open a new FDD databook?
- How do you deal with incomplete or late data from the target?
- What is the difference between a 'proof of cash' and a 'proof of concept' in the context of financial due diligence, and how would you use each to assess the target company's financial performance?
- What is the difference between a 'carve-out' and a 'standalone' cost, and how would you approach analyzing each in the context of financial due diligence?
- How would you approach analyzing the EBITDA bridge of a target company with multiple segments and significant one-time items, and what specific line items would you focus on to support your analysis?
- Describe pushing back on management's EBITDA add-backs that lack evidence or are inconsistently applied — how do you communicate it and what alternatives do you propose?
- How would you analyze the EBITDA bridge of a multi-segment target with significant one-time items, and which line items do you focus on?
- Why does data-room and management-information 'freshness' matter, and how do you handle a deal where the latest audited year is stale?
- How does FDD support the negotiation of SPA price-adjustment and protection mechanisms (price chips, escrows, indemnities)?
- Why and how do you compute a pro-forma full-year (annualized) view when a target acquired or disposed of a business mid-period?
- How do you surface off-balance-sheet and contingent liabilities in FDD, and how do they affect the deal?
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