What is Financial Due Diligence (FDD)?
Overview
Financial Due Diligence, also referred to as Transaction Services or Transaction Advisory Services, is a service provided by professional services firms to clients on either end of a potential transaction (M&A). The FDD provider will undertake financial analysis on a target company for the benefit of their client. FDD concerns itself with anything that will impact deal value (excluding the application of revenue/EBITDA multiples). This often relates to a focus three key workstreams:
Quality of Earnings;
Net Debt; and
Net Working Capital
Risk and value
The analysis undertaken provides information necessary for the client to better understand the viability of the proposed transaction, both from a risk and value perspective.
Please note that the client will likely dictate their key areas of risk and the scope of work will be adjusted to reflect this. An example may be that the PE firm looking to acquire the business may really want to get to grips with the customer economics in play - as such the scope of work will reflect that analysis needs to be undertaken on average customer ROI/IRR, considering average customer revenue, average contract lengths customer acquisition costs, customer retention costs, service delivery costs etc.
Whose side are you on?
Buy-side: Performing due diligence on behalf of a potential acquirer (the client)
Sell-side (Vendor Due Diligence): Producing an FDD-style report (referred to as a VDD report) on behalf the seller (the client), which will be shared with potential acquirers and the advisors of potential acquirers.
Further info
For further detail on the typical workstreams included in an FDD scope (including the three key workstreams above), please take a look at the next blog post.
All you need to know
The below information pack (60+ page document with accompanying example Excel databook) will benefit any individual looking into a potential move into the financial due diligence profession (often referred to as transaction services or transaction advisory services in the market). The information pack will prove useful for potential interview questions or even simply establishing a general understanding of the typical financial due diligence thought-process.
The pack will also be beneficial for any already successful FDD candidate who is looking to acquire a strong technical understanding in order to hit the ground running.
FDD Interview Preparation Pack and Example Excel Databook
Complete FDD (Transaction Services) interview preparation pack (60+ page document + example Excel databook). Insights into the FDD process and detailed technical examples covering all three key FDD workstreams: Quality of Earnings, Net Debt and Net Working Capital.
Candidate feedback on the interview preparation pack:
“I have passed my interview as a consultant in corporate finance. I was asked to prepare the "clean" EBITDA and Working capital. The information pack helped me a lot!” - H Yue, May 2023
“Informative and to the point, gave me the confidence I needed.” - Harkirat K, November 2022
“I was able to secure 2 full time offers from my interviews for TAS roles while reviewing the course pack. Most of the recruiters / managers interviewed with were impressed that I had a baseline understanding of FDD coming from an audit background at a big 4" - Jose V, August 2022