What the accountants examine
Financial due diligence is usually led by accountants, often through a quality of earnings analysis that adjusts reported earnings for one-time items, owner expenses, and accounting choices. It looks at revenue recognition, customer concentration, working capital trends, debt and debt-like items, and how reliable the target's internal reporting is. Tax diligence often runs alongside, looking for exposures the buyer could inherit, including sales tax obligations in states where the target did business. Findings often move the price directly, since many deals are valued as a multiple of adjusted earnings. The accountants' scope is set by their engagement letter, so it is worth confirming early which areas they will and will not cover.
Turning numbers into contract terms
Lawyers work with the financial team to make sure findings show up in the purchase agreement. A working capital target and adjustment mechanism protects the buyer against a business drained before closing, and its definitions must match how the accountants measured working capital. Debt-like items found in diligence can be deducted from the price. Specific indemnities or escrows can cover identified tax or liability exposures, and financial statement representations give the buyer recourse if the numbers were wrong. Mismatches between accounting definitions and legal drafting are a frequent source of disputes after closing.
For sellers, and for scoping the work
Sellers increasingly commission their own quality of earnings report before going to market, so that surprises surface on their own timeline. For buyers, we help set the scope of financial and legal diligence together, so the teams are not duplicating work or leaving gaps between them. Diligence reports, management presentations, and data room materials should be kept in an organized way, because they can matter in later claims about what was disclosed. We also consider whether accountants should be engaged through counsel where privilege may matter, recognizing that this protection is limited and depends on the facts.
