Red flags in financial due diligence — what to watch for

Sarah MitchellSEARCHER· 1 weeks ago

After losing a deal because we discovered issues too late in DD, I wanted to start a thread on red flags we should all watch for in financial due diligence. Here are my top ones: 1. Customer concentration >30% with one client 2. Significant related-party transactions 3. Revenue recognition timing that flatters the trailing twelve months 4. Working capital adjustments that aren't sustainable 5. Off-balance-sheet commitments What would you add to this list?

Comments (1)

Elena SantosSEARCHER· 1 weeks ago

I'd add: watch out for 'adjusted EBITDA' that adds back the owner's excessive salary, one-time costs that seem to recur every year, and capex that's been deferred to make EBITDA look better. Always normalize for maintenance capex.