Financial Glossary
Due diligence
Due diligence is the structured investigation a buyer, investor, or lender conducts before completing a transaction, verifying that representations made by a counterparty are accurate and uncovering material risks. It spans financial due diligence (auditing revenue, expenses, working capital, and debt), legal due diligence (reviewing contracts, litigation exposure, and ownership), operational due diligence (assessing processes, systems, and key-person dependencies), and commercial due diligence (validating market size and competitive position). The process produces a diligence report that supports deal pricing, negotiating representations and warranties, and structuring contingencies.
Problem & Application
A private equity firm evaluating the acquisition of a campground portfolio would conduct financial due diligence by requesting three years of GAAP financials and trailing-twelve-month management accounts, then reconciling reported EBITDA to actual cash generated. Common findings include owner-benefit add-backs (personal expenses run through the business), deferred maintenance not reflected in expenses, and revenue recorded when booked rather than when the stay occurred. Suppose the seller claims $600K adjusted EBITDA; diligence reveals $80K of non-recurring revenue and $50K of deferred capital expenditures that should be expensed, reducing normalized EBITDA to $470K. At an 8x multiple, that adjustment alone shifts value by $1.04M. For sellers, having clean, well-documented financials with reconciled records and no commingled personal expenses shortens diligence timelines, reduces escrow holdbacks, and supports higher valuations.
In Short
Proper due diligence ensures informed decision-making and minimizes investment risks.