Financial Statement Analysis for M&A Due Diligence
Systematically analyze target financials to spot red flags and valuation risks in M&A deals
by bitwize-music-studioConsulting & Professional ServicesManagement ConsultingStrategy ConsultantDue DiligenceWhat You Can Do
You'll systematically extract insights from income statements, balance sheets, and cash flow statements to reveal true earning power, hidden liabilities, and working capital surprises. The framework helps you identify accounting quality concerns, quantify normalization adjustments for EBITDA models, and build evidence-based negotiation positions backed by financial pattern analysis that influences deal valuation and pricing.
Features
systematically review income statements, balance sheets, and cash flow statements to identify trends and anomalies
spot red flags in revenue recognition, expense timing, accruals, and reserves that signal earnings quality issues
uncover off-balance-sheet obligations, contingent liabilities, and working capital surprises that impact valuation
quantify one-time items, non-recurring expenses, and management adjustments for comparable EBITDA calculations
calculate the financial impact of identified issues on enterprise value, terminal value assumptions, and deal pricing
contextualize target performance against industry standards to validate growth claims and margin assumptions
generate detailed findings with supporting evidence for management deep-dive sessions and price negotiation discussions
identify seasonal patterns, receivables quality, inventory turnover, and payables management risks
Example Output
Income Statement Analysis:
- Revenue growth: 18% CAGR (2021-2023), but Q4 2023 shows 8% sequential decline vs. historical 12% average
- Gross margin compression: 42% → 38% over three years, driven by unfavorable product mix and rising input costs
- SG&A leverage: Declining from 28% to 24% of revenue, but includes $2.1M one-time severance costs in 2023
Red Flags Identified:
- ✓ Days sales outstanding increased from 45 to 62 days; $1.3M allowance for doubtful accounts added in 2023
- ✓ Inventory turnover slowed 23%; $4.2M obsolescence reserve suggests product cycle risk
- ✓ Deferred revenue declined $3.8M (unusual for SaaS model); customer retention needs validation
Normalization EBITDA 2023:
- Reported EBITDA: $12.4M | Adjusted for severance (+$2.1M), non-recurring consulting (+$0.8M), stock-based comp (+$1.8M) | Normalized EBITDA: $17.1M
What's Included
- SKILL.md instruction file with due diligence framework methodology:
- Financial Red Flag Checklist: 40+ accounting quality indicators organized by statement line item
- Normalization Adjustment Template: structured format for documenting and quantifying add-backs
- Three-Year Analysis Workbook: guided template for ratio analysis, trend analysis, and peer benchmarking
- Management Deep-Dive Question Bank: evidence-based questions tied to financial findings
Who It's For
- M&A advisors and investment bankers conducting buy-side or sell-side due diligence
- Corporate development professionals evaluating acquisition targets and deal economics
- Private equity analysts assessing investment thesis and valuation assumptions
- CFOs and finance leaders preparing companies for acquisition or evaluating acquisition targets
- Business valuation specialists building normalized financial models for deal pricing
Best For
- Preliminary financial due diligence (weeks 1-3 of transaction process)
- Identifying normalization adjustments for comparable EBITDA analysis
- Preparing financial deep-dive agendas and management presentation materials
- Documenting accounting quality concerns and valuation risk quantification
- Building evidence-based price negotiation strategies and renegotiation positions
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