Financial due diligence is led by a transaction CPA and reads the target's balance sheets, income statements, tax documents, and debt schedules to validate financial health and surface the red flags that change pricing. The findings flow directly into the purchase price, the working capital peg, and the earnout structure.
Customer Concentration
Customer concentration is one of the most consequential financial red flags: a top customer representing more than 20% of revenue means the loss of a single relationship would crater the business. A target that looks healthy on aggregate revenue can be dangerously fragile if that revenue depends on one or two customers. Concentration is found by reading the revenue detail and the customer contracts — and a contract with a change-of-control provision held by a concentrated customer is a compounded risk.
Quality of Earnings
Quality-of-earnings issues are the ways reported earnings overstate the real, sustainable economics of the business: aggressive revenue recognition (booking revenue early or that may not materialize), understated expenses, and one-time items presented as recurring. Financial diligence normalizes the earnings to what the business actually, sustainably produces — which is often lower than the headline figure the seller presents.
Working Capital and Trends
Working capital surprises and deteriorating financial trends round out the core financial flags, along with disconnects between management's projections and historical performance — when the forecast assumes a growth rate the company has never achieved. The AI agent reads the financial documents and surfaces concentration, quality-of-earnings signals, and trend issues for the CPA's review. It's demonstrated at omnionlinestrategies.com/ai-agent-ma-due-diligence.