Financial Due Diligence Checklist for M&A Transactions
Updated February 2026
Understand the business well enough to make an informed investment decision and price the deal correctly.
Financial due diligence is the process of verifying a target company's financial position before completing an acquisition. This checklist covers the essential documents, analyses, and red flags that every buyer should address — whether you're an independent searcher or a PE deal team.
Overview
Effective financial due diligence requires a structured approach. The goal isn't to check every box — it's to understand the business well enough to make an informed investment decision and price the deal correctly. A Quality of Earnings analysis is the centerpiece of this process.
Financial Statements
Income statements
3–5 years, audited if available, plus year-to-date interim
Balance sheets
3–5 years with monthly/quarterly detail for most recent 2 years
Trial balance exports
From accounting system (QuickBooks, Xero, etc.) with chart of accounts
Cash flow & bank statements
Cash flow statements or bank statements for proof of cash analysis
Tip: Shepi's QuickBooks integration can pull trial balance data directly, eliminating manual export errors.
Tax Documents
Income tax returns
3–5 years of federal and state returns
Sales & payroll tax
Sales tax returns, 940/941 payroll tax returns
IRS correspondence
Any audit history or correspondence
Property tax
Assessments and payment history
Revenue & Customer Analysis
Revenue by customer
Top 10–20 customers with concentration analysis
Revenue by segment
Product/service line, geography, and channel breakdown
Contracts & backlog
Customer contracts, MSAs, backlog, and pipeline reports
Pricing & retention
Pricing history, upcoming changes, churn and retention metrics
Expense & Payroll Analysis
Payroll detail
Payroll register with employee-level detail and officer compensation history
Benefits & contractors
Health, retirement, PTO summaries plus 1099 contractor payments
Vendor concentration
Top 10 vendors by spend with lease and insurance agreements
Expense classification
Discretionary vs. non-discretionary expense breakdown
Balance Sheet Items
Receivables & payables
AR aging schedule and AP aging schedule
Inventory & fixed assets
Inventory detail, valuation methodology, fixed asset register with depreciation
Debt & liabilities
Debt schedule, accrued liabilities detail, prepaid expenses and deposits
Off-balance-sheet
Guarantees, commitments, and other off-balance-sheet obligations
Legal & Compliance
Contracts & litigation
Material contracts, pending or threatened litigation
Licenses & permits
Regulatory licenses, environmental compliance records
IP & related parties
Intellectual property documentation and related-party transaction disclosures
Common Red Flags
Revenue concentration
More than 20% of revenue from a single customer
Declining margins
Gross or operating margins trending down without clear explanation
Working capital trends
DSO increasing, suggesting collection issues
Related-party transactions
Significant transactions with entities owned by the seller
Tax vs. financial gaps
Material differences between tax returns and financials not explained
Deferred maintenance
CapEx significantly below depreciation for extended periods
Accounting changes
Frequent method switches, reclassifications, or restated periods
Missing records
Gaps in documentation raise questions about what else might be missing
Due Diligence Timeline
Week 1
Submit document request list and begin data collection
Week 2–3
Initial data review, account mapping, and preliminary analysis
Week 3–4
Detailed analysis, management Q&A, follow-up requests
Week 4–6
Draft findings, adjustment quantification, working capital analysis
Week 6–8
Final report, negotiation support, closing adjustments
With Shepi's AI-assisted platform, the analysis phase (weeks 2–4) can be compressed to days rather than weeks.