The Deal Was Ready to Sign. Financial Due Diligence Then Changed the Conversation.
After nearly four months of negotiations, the acquisition appeared ready to close. The lawyers had prepared a near-final purchase agreement. Financing was approved. Regulatory approvals were progressing, and the management teams had already begun discussing post-acquisition integration.
The buyer, a European industrial group, wanted a stronger manufacturing presence in Asia. The target seemed to offer exactly that: a profitable business with operations in Mainland China, a trading platform in Hong Kong and overseas sales companies serving Europe and North America.
On paper, the investment case was compelling. Revenue had grown for five consecutive years. EBITDA margins compared favourably with industry peers. The latest financial statements carried an unmodified audit opinion. Management had answered hundreds of due diligence questions, and legal counsel had identified no major obstacle to completion.
Yet, as the FDD lead partner presented the findings, the discussions in the room began to change.
There had been no discovery of fraud, hidden bank debt or a lost major customer. Instead, the review had uncovered a series of quieter issues: year-end shipments that flattered growth, earnings adjustments that had begun to look recurring, cash that could not readily leave the jurisdiction in which it sat, and finance processes that depended heavily on a few individuals.
None was fatal on its own. Together, they changed the buyer’s view of value, risk and what would need to happen after completion.
The transaction described here is a composite drawn from financial due diligence engagements involving businesses in Mainland China and Hong Kong. The particulars have been generalised, but the findings—and the ten lessons that follow—recur in deal after deal.
Ten financial due diligence lessons from cross-border M&A deals involving businesses in Mainland China and Hong Kong
The ten lessons below follow the natural logic of financial due diligence: reported revenue, sustainable earnings, working capital, cash, debt-like items, intercompany balances, tax, reporting systems, people dependency and post-completion execution. Each lesson starts with what the buyer first saw, then explains what financial due diligence actually found, why it mattered commercially and the practical lesson for future transactions.
Lesson One — Reported revenue is not the same as quality revenue
What the buyer first saw: Revenue had grown steadily for five consecutive years, and the customer list appeared diversified across several overseas markets.
What FDD actually found: A closer review showed that part of the growth came from accelerated shipments near year end, favourable one-off orders and changes in sales terms with several key customers. Certain customers purchased irregularly, while others required extended credit or post-sale support that was not obvious from the revenue line alone.
Why it mattered commercially: The issue was not whether revenue had been recorded. The issue was whether that revenue could be relied upon to continue after completion. Revenue that is non-recurring, concentrated or dependent on unusually favourable terms deserves a different valuation treatment from stable, repeatable revenue.
Practical lesson: In financial due diligence, buyers should look beyond reported sales and ask whether revenue is recurring, well supported, properly cut off and commercially sustainable.
Lesson Two — EBITDA needs to be normalised before it can support valuation
What the buyer first saw: Management presented a strong EBITDA trend and used that performance to support the proposed valuation multiple.
What FDD actually found: The reported EBITDA included government grants, one-off disposal gains, foreign exchange movements, insurance recoveries and related-party charges that were described as exceptional but had appeared regularly in prior years. Certain owner-related costs and under-accrued expenses also required adjustment.
Why it mattered commercially: A buyer does not pay for accounting profit in the abstract. It pays for a sustainable earnings base. Even modest EBITDA adjustments can materially affect valuation when the purchase price is based on an earnings multiple.
Practical lesson: Quality of earnings analysis should separate recurring operating performance from one-off, discretionary, related-party or non-operating items before EBITDA is used for pricing.
Lesson Three — Working capital tells the buyer how much cash the business really needs
What the buyer first saw: The target appeared profitable and cash generative, with working capital ratios broadly consistent with industry averages.
What FDD actually found: Accounts receivable ageing had lengthened, certain inventory lines were slow-moving, and supplier payment patterns had become stretched during peak production periods. The historical working capital balance also fluctuated significantly by season.
Why it mattered commercially: A profitable business may still require substantial cash to operate. If the working capital peg is set too low, the buyer may effectively fund part of the seller’s historical business model immediately after completion.
Practical lesson: FDD should identify the normalised level of working capital required to run the business, taking into account seasonality, ageing, inventory quality and payment behaviour.
Lesson Four — Cash is not always freely available cash
What the buyer first saw: The target’s bank balances appeared healthy, and management presented the group as having strong liquidity.
What FDD actually found: Some cash was pledged against banking facilities, some was held in Mainland China subject to approval and remittance procedures, and certain accounts were controlled by limited signatories. Cash existed, but not all of it was immediately available for group use.
Why it mattered commercially: Available cash affects purchase price, completion mechanics and post-deal funding needs. Cash trapped by regulation, banking arrangements or operational controls may not provide the same economic benefit as unrestricted cash.
Practical lesson: FDD should distinguish accounting cash from freely available cash, especially in cross-border transactions involving RMB balances, pledged deposits and local banking controls.
Lesson Five — Debt-like items often sit outside bank borrowings
What the buyer first saw: The target had modest bank debt, and management described the balance sheet as relatively clean.
What FDD actually found: The review identified accrued bonuses, overdue payables, customer advances, lease commitments, unpaid tax exposures, warranty provisions and capital expenditure commitments that required consideration as debt-like or price-adjusting items.
Why it mattered commercially: Purchase price discussions often focus on headline debt, but economic obligations may sit elsewhere on the balance sheet or outside it. If these items are not identified before signing, the buyer may inherit value leakage after completion.
Practical lesson: FDD should look beyond bank borrowings and assess all liabilities, commitments and obligations that behave economically like debt.
Lesson Six — Intercompany balances reveal settlement discipline and deal leakage risk
What the buyer first saw: Intercompany balances appeared to be a routine feature of a multinational group, and none seemed individually material.
What FDD actually found: Reconciliations did not always match between entities. Some balances related to trading activity, others to funding, management charges or historical temporary entries. Several amounts had remained unsettled for years and were affected by foreign exchange differences.
Why it mattered commercially: The issue was not simply whether the balances were correct. It was whether value had been, or could still be, moved around the group before completion, and whether the buyer could rely on the reported net asset position.
Practical lesson: Intercompany balances should be reconciled, classified and commercially explained before completion, with unresolved matters reflected in price, indemnities or completion account mechanisms.
Lesson Seven — Tax compliance is different from tax sustainability
What the buyer first saw: Tax returns had been filed, no major disputes were reported, and the historical effective tax rate appeared favourable.
What FDD actually found: Several subsidiaries benefited from preferential tax treatment, local incentives, VAT/export arrangements and historical transfer pricing positions. Some benefits depended on ownership structure, business activities or periodic reassessment.
Why it mattered commercially: A historical tax rate may not continue after a change in ownership, operating model or group structure. A buyer may therefore overvalue the business if it assumes that past tax benefits are permanent.
Practical lesson: Tax due diligence should assess not only whether historical filings were compliant, but whether the tax position is sustainable under the buyer’s intended ownership and operating model.
Lesson Eight — Financial reporting systems affect post-deal integration and reporting reliability
What the buyer first saw: The target produced monthly management accounts and appeared able to respond to most information requests.
What FDD actually found: The group used multiple accounting systems, inconsistent charts of accounts and manual spreadsheets for consolidation. Month-end close depended on local workarounds, and key performance indicators were not defined consistently across entities.
Why it mattered commercially: Poor reporting infrastructure does not necessarily reduce historical profit, but it affects how quickly and reliably the buyer can monitor performance after completion. It also increases the cost and complexity of integration.
Practical lesson: FDD should assess the reliability of management information, the quality of the close process and the practical difficulty of integrating reporting systems after completion.
Lesson Nine — Key finance personnel and undocumented processes are a transaction risk
What the buyer first saw: The finance team was responsive, experienced and able to provide explanations throughout the diligence process.
What FDD actually found: Critical tasks such as consolidation adjustments, foreign exchange calculations, transfer pricing allocations and lender reporting depended heavily on a small number of long-serving individuals. Several spreadsheet models were not formally documented.
Why it mattered commercially: A buyer may acquire not only a business, but also a dependency on people who understand how the numbers are produced. If that knowledge leaves, the quality of reporting and control may deteriorate quickly.
Practical lesson: FDD should identify key-person dependency in the finance function and convert undocumented processes into post-completion action items.
Lesson Ten — FDD should feed directly into SPA protections and Day-One actions
What the buyer first saw: Completion appeared to be the natural end point of the transaction timetable.
What FDD actually found: The findings had direct implications for the Share Purchase Agreement and the first 100 days: working capital mechanisms, debt-like items, tax warranties, indemnities, holdbacks, bank mandate changes, reporting integration and control remediation.
Why it mattered commercially: A diligence finding has limited value if it remains only in a report. Its value is realised when it changes the price, improves contractual protection or becomes a practical post-completion action.
Practical lesson: The best FDD work connects findings to deal negotiation, SPA drafting and Day-One execution, so that the buyer knows not only what it is acquiring, but what must be fixed after completion.
The deal still completed—but on a clearer basis
By the end of the findings meeting, the buyer had not lost confidence in the acquisition. It had gained a more realistic understanding of it.
The deal went ahead. The buyer established the Asian manufacturing presence it had set out to build, and the target continued to grow. But the transaction did not proceed on exactly the basis first envisaged. Sustainable earnings were distinguished from reported EBITDA. Working capital and debt-like items were addressed in the completion mechanics. Specific risks were reflected in the contractual protections, and reporting, banking and control matters were built into the first 100-day plan.
Most of the issues identified during diligence were resolved within the first year. That was possible largely because they had been priced, documented or assigned before completion—not encountered for the first time afterwards.
This is the practical value of financial due diligence. It is not a search for a dramatic flaw, nor is it measured by the length of the report. It is the discipline of understanding how a business truly earns, uses and moves money—and then converting that understanding into better decisions.
The financial statements tell the buyer what has been reported. Financial due diligence helps the buyer decide what those numbers are worth, what protections are needed and what must happen next.