Every acquisition is built on assumptions. Financial due diligence exists to determine whether those assumptions are accurate. For many government contractors, diligence becomes the most stressful part of a transaction — not because problems exist, but because preparation is incomplete.
What Is Financial Due Diligence?
Financial diligence is the buyer's effort to understand historical performance, earnings quality, cash flow, revenue quality, risks, and opportunities. The objective is not finding mistakes. The objective is validating value.
"The strongest transactions occur when management has already organized the information buyers need — before diligence begins."
Area 1: Historical Financial Performance
Buyers review revenue trends, margin trends, EBITDA trends, and cash flow trends. Documents required include three years of financial statements, monthly financial packages, trial balances, and general ledger detail. Key buyer questions: what drives growth? What drives margins? Are trends sustainable?
Area 2: Quality of Earnings
Buyers want to understand sustainable EBITDA. Areas reviewed include one-time expenses, non-recurring revenue, extraordinary events, and owner adjustments. Common adjustments include owner compensation normalization, legal expenses, consulting projects, and extraordinary bonuses.
Area 3: Revenue Quality
Revenue analysis often drives valuation. Buyers review revenue by customer, revenue by contract, backlog, pipeline, and recompete schedules. Customer concentration above 20–30% typically becomes a significant discussion point.
Area 4: Working Capital
Working capital frequently becomes one of the most negotiated aspects of a transaction. Buyers evaluate accounts receivable aging, accounts payable, billing practices, cash conversion cycles, and seasonal trends. Many companies discover working capital surprises only after diligence begins.
Area 5: GovCon-Specific Items
Government contracting transactions involve additional scrutiny including indirect rate calculations and trends, DCAA compliance history and audit findings, timekeeping system documentation, government contract terms and recompete schedules, and security clearance documentation. These items require preparation that commercial companies do not face.
The Financial Diligence Checklist
Historical Performance
- Three years of financial statements (audited preferred)
- Monthly financial packages for prior 24 months
- Trial balances
- General ledger detail
Revenue & Backlog
- Revenue by customer and contract (prior 3 years)
- Funded backlog schedule
- Unfunded backlog schedule
- Pipeline documentation
- Recompete schedule with expiration dates
EBITDA Quality
- Identified one-time and non-recurring items
- Supporting documentation for all proposed adjustments
- Owner compensation analysis
Working Capital
- Accounts receivable aging
- Accounts payable aging
- Historical DSO analysis
- Cash flow statements (prior 3 years)
GovCon-Specific
- Indirect rate schedules (prior 3 years)
- DCAA audit history
- Timekeeping system documentation
- Contract terms and compliance certifications
Frequently Asked Questions
Know where you stand — before buyers do.
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