Financial Due Diligence in India: What Investors Look For Before Investing

Before an investor writes a cheque or an acquirer signs a deal, they commission due diligence to test the business's numbers. For founders, knowing what diligence looks for is the best way to prepare. This guide covers the financial side.

Quality of Earnings

Diligence starts with reported profit and adjusts it to show sustainable, recurring earnings. Typical adjustments include:

• One-off income, like a single large order or a grant.
• Non-recurring costs, like litigation or restructuring.
• Founder salaries below or above market rates.
• Revenue recognised too early, or costs deferred.
• Related party transactions not on arm's-length terms.

Revenue Quality

For startups especially, investors look at how revenue is made up: recurring versus one-off, customer concentration, churn, and whether revenue in the pitch deck reconciles to the audited accounts.

Working Capital

Diligence analyses receivables, inventory and payables over time to work out the normal level of working capital the business needs. In acquisitions, this often becomes a target, with the price adjusted if actual working capital at completion is different.

Net Debt and Debt-like Items

Beyond bank loans, diligence looks for items that behave like debt: unpaid statutory dues, deferred payments to suppliers, customer advances, unfunded employee liabilities and disputed tax demands. These are often deducted from the price.

Balance Sheet Review

• Are receivables collectable?
• Is inventory saleable and properly valued?
• Are all liabilities recorded, including contingent ones?
• Are assets real and owned by the company?

Common Red Flags

• Numbers in management accounts that don't reconcile to audited accounts.
• Significant revenue from related parties.
• Large, unexplained adjustments at year end.
• Personal expenses run through the business.
• Gaps in statutory compliance.

How Founders Can Prepare

1. Keep books reconciled and monthly MIS consistent with audited accounts.
2. Document significant contracts and related party arrangements.
3. Clear statutory dues and pending filings.
4. Prepare a data room with financials, contracts and compliance records.

Getting Help

Think Filing performs financial due diligence for investors and acquirers, and vendor due diligence for founders preparing to raise or sell.