Answers / Financial Due Diligence

How does FDD support the negotiation of SPA price-adjustment and protection mechanisms (price chips, escrows, indemnities)?

A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

FDD findings are the ammunition for the legal and commercial negotiation. A quantified, well-evidenced issue translates into a specific lever: a sustainable EBITDA shortfall is a 'price chip' (multiply by the multiple to size the headline price reduction); a one-off but probable future cash cost (a tax exposure, a customer at risk) supports a specific indemnity or an escrow/retention to cover it; an uncertain or contingent risk supports a warranty and possibly W&I insurance. Net-debt and debt-like findings flow straight into the completion price true-up. The discipline is to make each finding actionable — quantified, with the recommended mechanism — rather than just descriptive, so the deal team can choose between adjusting price, restructuring the deal, or allocating the risk contractually. The best FDD reports map findings to the relevant SPA clause.

WHAT INTERVIEWERS LISTEN FOR

  • ✓EBITDA shortfall → price chip (× multiple)
  • ✓Probable future cost → indemnity/escrow; uncertain risk → warranty/W&I
  • ✓Net-debt/debt-like findings → completion true-up
  • ✓Make each finding quantified and actionable, mapped to SPA

COMMON MISTAKES

  • ✗Findings left descriptive, not actionable
  • ✗No link between issue type and protection mechanism
  • ✗Ignoring how findings flow to the price/true-up

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