While the economic and geopolitical environment has been quite unstable over the last couple of years, experts believe 2026 might bring some cautious optimism for investment opportunities.
With that in mind, we want to highlight the importance for founders and investors to get ready for the investment round in the right way.
In this article, we describe financial due diligence as one of the main stages of due diligence in the investment process. Read on to learn what investors care the most about during due diligence, what red flags can delay the deal, and how a financial due diligence checklist and dedicated due diligence software help make the review process smooth and efficient.
What Is Financial Due Diligence for Investors?
Financial due diligence is the moment when investors check how the business really holds together in terms of finance. Up to this point, they’ve heard the story. Now they want to see whether the numbers back it up.
From a founder’s point of view, it’s like walking someone through how money moves through your company. Investors look at past results, compare them over time, and try to understand what’s normal for the business and what’s not. That’s how they form their view of the company’s financial performance.
The financial due diligence process helps investors feel comfortable that they understand the business well enough to proceed or, if something doesn’t add up, to pause and dig deeper before committing.
Also read: Learn what an investment due diligence is
Quick Screening vs. Deep Dive
Financial due diligence usually doesn’t start with a full inspection. In most cases, investors begin with a quick screening to decide whether the opportunity is worth deeper time and effort. Only if the numbers pass that first filter does the review expand into a more detailed analysis.
- Quick screening focuses on the basics. Investors scan high-level figures to see if the business fits their expectations and risk appetite. At this stage, they are looking for obvious gaps, inconsistencies, or signals that the company’s financial health may not support the proposed deal.
- Deep dive diligence comes later and goes much further. Here, the diligence examines how the business actually operates financially: from revenue quality to cost structure and long-term viability. This is where assumptions are tested, edge cases are explored, and potential issues surface in more detail.
Here’s a brief comparative table for you to better understand how these two types of financial review differ:
| Aspect | Quick screening | Deep dive |
|---|---|---|
| Purpose | Decide whether to proceed | Validate the investment case |
| Level of detail | High-level, summary view | Detailed and granular review |
| Time required | Short, often days | Longer, often weeks |
| Typical outcome | Go / no-go decision | Inputs for valuation and deal terms |
Core Financial Documents Investors Prioritise
Let’s get through the documents that investors care about the most during the financial due diligence process.
Historical financial statements
This is the foundation of the review. Investors rely on audited financial statements where available, or at least consistent historical reports, to assess trends and the overall company’s financial stability. These documents help them see how the business has performed across different periods and whether results are improving, flat, or volatile.
Examples investors review:
- Income statements (monthly and annual)
- Balance sheets
- Cash flow statements
- Notes to the financial statements
Cash flow and liquidity
Strong revenue on paper doesn’t always mean a healthy business. Investors look closely at liquidity to understand how well the company manages working capital and whether it can fund day-to-day operations without constant outside support.
Examples investors review:
- Cash flow reports
- Cash balance summaries
- Short-term debt schedules
- Working capital analyses
Revenue breakdown and customer data
This group helps investors understand how predictable and diversified revenue really is. They assess whether growth is driven by a few key customers or supported by stable customer relationships over time.
Examples investors review:
- Revenue by customer and product
- Customer contracts
- Churn and retention metrics
- Deferred revenue schedules
Tax and compliance records
Tax issues can create delays or unexpected costs later in the deal. Reviewing tax filings allows investors to confirm that reporting is accurate and aligned with stated results, reducing the risk of future adjustments.
Examples investors review:
- Corporate tax returns
- VAT or sales tax filings
- Tax payment schedules
- Correspondence with tax authorities
Accounting policies and controls
Investors also want to know how reliable the numbers are. Reviewing accounting practices and internal processes helps them judge whether financial reporting is consistent and whether the business has basic financial controls in place.
Examples investors review:
- Accounting policy document
- Revenue recognition methodology
- Internal audit reports (if available)
- Financial control procedures
Financial Due Diligence Checklist
Before opening access to documentation to investors, founders should aim to gather all key materials in one place.
This checklist reflects what a typical due diligence team expects to see when they conduct a financial review as part of a live deal. Having these documents ready helps you keep the transaction process moving smoothly.
Also read: Data room for investors checklist
| Document category | What to include |
|---|---|
| Financial statements |
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| Balance sheet support |
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| Revenue and pricing |
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| Cost structure |
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| Cash and liquidity |
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| Working capital |
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| Tax documentation |
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| Forecasts and budgets |
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| Accounting and controls |
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| One-off or non-recurring items |
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Red Flags That Trigger Follow-Ups
These issues, when revealed during due diligence, might significantly impact the deal outcomes:
- Inconsistent numbers across documents. When figures don’t match between reports, investors immediately slow down. Differences between management accounts and official financial statements raise questions about financial reporting quality and whether the underlying data can be trusted.
- Unexplained swings in revenue or margins. Sudden growth or sharp declines without a clear business reason usually lead to deeper questions. Investors want to understand if changes reflect real market shifts or potential financial risks that haven’t been addressed yet.
- Weak or unclear cash position. A business can look profitable and still struggle with cash. Poor visibility into cash balances or irregular cash movements often prompts follow-ups around liquidity and short-term solvency.
- Unresolved tax or compliance issues. Missing filings, late payments, or ongoing disputes can signal future costs. These situations raise concerns about possible hidden liabilities that may surface after the transaction closes.
- Overreliance on a small number of customers. Heavy dependence on one or two clients makes revenue fragile. If those relationships change, it can quickly affect the target company’s results and long-term outlook.
- Limited insight into costs and commitments. Vague expense categories or missing details on long-term obligations make investors cautious. This is often where they start trying to uncover hidden risks that weren’t obvious during early review.
- Gaps in documentation or delayed responses. Missing files or slow follow-ups can be just as concerning as bad numbers. Investors may read this as a sign that the diligence process hasn’t been taken seriously or that internal processes are not well organised.
How Investors Use Financial Findings to Shape the Deal
Once diligence financial work is complete, investors use the results to make practical deal decisions. The numbers influence how the transaction is structured.
Investors typically use financial findings to:
- Reassess valuation. The company’s financial records are reviewed to check whether the business reflects a reasonable fair market value. Close attention is paid to balance sheets, which often reveal obligations that affect pricing.
- Adjust deal terms. If the target’s financial performance shows uncertainty, investors may reflect that risk in the sales and purchase agreement. This can mean price adjustments, earn-outs, or additional conditions.
- Validate future potential. Reliable financial data that supports sustainable earnings increases confidence and reduces the need for protective clauses. Weak or unclear data usually has the opposite effect.
- Decide how to move forward. Investors rely on data-driven insights to support informed decision-making, whether that means confirming the purchase price, refining the structure, or pausing the deal and bringing in external advisors for further review.
Investors will often use this information to prepare their own financial due diligence report, focusing on whether the business can support sustainable earnings over time. The more complete and clearly structured the checklist is, the easier it is for both sides to focus on the deal.
Role of virtual data rooms
A virtual data room (VDR) helps keep financial due diligence services organised, controlled, and predictable, especially once multiple stakeholders are involved. Instead of reacting to ad-hoc document requests, founders can manage the process proactively.
Also read: What is a data room for investors?
Here’s how a virtual data room supports financial due diligence:
- Centralised access to documents. All financial materials live in one secure place, making it easy for reviewers to find what they need without jumping between emails or shared drives.
- Clear structure and version control. Documents can be grouped by category, updated when needed, and replaced without confusion over which version is current.
- Controlled visibility and permissions. Access rights ensure that sensitive files are only visible to approved parties, helping founders stay in control as the review expands.
- Efficient Q&A and follow-ups. Questions can be handled directly within the platform, reducing back-and-forth and keeping discussions tied to specific documents.
- Transparency into reviewer activity. Usage logs show which files attract the most attention, helping founders anticipate questions and respond faster.
Used well, a virtual data room turns due diligence from a reactive scramble into a structured, manageable process that supports smoother deal execution.
Key takeaways
Financial due diligence helps investors confirm that the numbers presented in a pitch truly match how the business operates in real life. Most investors begin with a quick initial review and only move into a deeper analysis if the early financial picture aligns with their expectations. When a company provides clear and consistent core financial documents, it reduces red flags and helps avoid unnecessary delays during the review process. The results of financial due diligence also play a major role in shaping valuation, influencing deal terms, and ultimately determining whether an investment moves forward. For founders, using a well-structured virtual data room can make the entire process more efficient, transparent, and much easier to manage.