Answers / Financial Due Diligence
Why is FDD important in an M&A transaction?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
FDD protects the buyer from overpaying by: (1) validating the earnings base that drives the price, (2) identifying hidden liabilities and debt-like items, (3) setting a fair working capital target, (4) flagging deal-breakers before signing, and (5) providing leverage for price negotiations. A €100k EBITDA adjustment at an 8x multiple = €800k purchase price impact.
WHAT INTERVIEWERS LISTEN FOR
- ✓Validates earnings base
- ✓Identifies hidden liabilities
- ✓Sets working capital target
- ✓Flags deal-breakers
- ✓Provides negotiation leverage
COMMON MISTAKES
- ✗Treats FDD as optional
- ✗Ignores EBITDA adjustments
- ✗Confuses FDD with legal due diligence
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RELATED QUESTIONS
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- Why must you reconcile management accounts to the audited statutory financials early in an FDD, and what do gaps tell you?