Financial Statement Analysis for M&A Due Diligence
Extract, normalize, and analyze financial statements to identify M&A risks and valuation drivers
What You Can Do
You can extract and analyze multi-year financial statements (income statements, balance sheets, cash flow statements) to identify discontinuities, related-party transactions, and accounting policy changes. The skill guides you through normalizing GAAP earnings for valuation models, quantifying working capital adjustments, documenting earn-out conditions, and preparing comprehensive findings for investment committee presentations and LOI support.
Features
systematically pull data from 3-5 years of target financials to identify trends and anomalies
adjust GAAP earnings for one-time items, related-party transactions, and non-recurring charges to calculate normalized EBITDA
detect accounting policy changes, aggressive revenue recognition, unusual accruals, and expense timing shifts
quantify net working capital adjustments, accounts receivable aging, inventory reserves, and payables normalization
analyze capex patterns, asset age, maintenance vs. growth spending, and cash conversion efficiency
extract and quantify key metrics (margins, returns, growth rates) that drive purchase price multiples
estimate impact of identified issues on valuation, funding, and post-acquisition integration
structure findings, schedules, and recommendations for senior management review and decision-making
Example Output
Example 1: Revenue Red Flag Identification
- Target shows 25% YoY revenue growth but accounts receivable increased 40% while DSO rose from 35 to 52 days
- One customer (15% of revenue) changed payment terms from Net 30 to Net 60 in Q4—not disclosed in footnotes
- Risk: Revenue quality concern; $2.1M of the $5M growth is timing-driven, not organic
Example 2: EBITDA Normalization Schedule
- GAAP Net Income: $8.5M
- Add: D&A: $3.2M
- Add: Stock-based comp (non-recurring): $1.1M
- Add: CEO severance (one-time): $0.9M
- Less: Intercompany service fees at above-market rates: ($0.6M)
- Normalized EBITDA: $13.1M vs. reported $11.8M (11% uplift)
Example 3: Working Capital Adjustment
- Current ratio deteriorated from 1.8x to 1.2x; inventory reserve policy changed mid-year
- AP aging extended 20 days coinciding with new vendor agreements
- Estimated working capital cash outlay at close: $2.8M (versus $1.1M historical average)
What's Included
- SKILL.md: step-by-step instruction file for financial statement extraction and analysis workflow
- Multi-year Analysis Template: structured workbook for capturing 3-5 years of statement data with automated variance analysis
- Earnings Normalization Schedule: pre-built framework for GAAP-to-normalized adjustments with common M&A add-back categories
- Red Flag Checklist: systematic review guide covering revenue recognition, expense timing, related-party transactions, and accounting changes
- Working Capital & Adjustment Calculator: tools for quantifying NWC, capex, and deal-specific adjustments for purchase price allocation
Who It's For
- M&A Analysts — conducting financial due diligence on buy-side or sell-side transactions
- Investment Committee Members — reviewing financial findings and deal risks before LOI or close
- Corporate Development Professionals — validating acquisition targets during evaluation phase
- Private Equity Associates — supporting senior deal teams with financial statement analysis and normalization work
- CFO/Finance Teams — preparing financial due diligence packages for strategic or financial buyers
Best For
- Multi-period financial analysis — extracting and comparing 3-5 years of audited and unaudited statements
- Earnings normalization — adjusting GAAP metrics for one-time items, related-party transactions, and policy changes
- Anomaly detection — identifying discontinuities in revenue quality, receivables aging, margin trends, and accruals
- Working capital quantification — calculating adjustments for inventory reserves, receivables, payables, and other balance sheet items
- Deal risk documentation — structuring findings for management presentations and valuation model impact analysis
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