“Caveat Emptor”, a Latin phrase, which means “let the buyer beware”, usually, applies to all contracts of sale and purchase of goods and services. The principle of caveat emptor requires a buyer to assess and investigate the goods and services being bought since once sold, all the risks of such goods and services belong to the buyer and the Sellers is relieved of all the risks of goods and services sold. Caveat Emptor also applies to the sale and purchase of businesses. Accordingly, an Acquirer is required to assess and investigate all the risks and potential losses associated with a business before acquiring the business. The process of making such an assessment and investigation is called due diligence.
Investopedia.com states that “due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party. Due diligence is a systematic way to analyse and mitigate risk from a business or investment decision. Due diligence involves examining a company’s numbers, comparing the numbers over time, and benchmarking them against competitors. The same due diligence strategy will work on many other types of investments.”
While there are many types of due diligences required to be conducted in a M&A transaction, such as operational due diligence, commercial due diligence, legal due diligence, tax due diligence, etc., financial due diligence in most cases is the most important due diligence from an Acquirer’s perspective.
What Is Financial Due Diligence and Why Does It Matter in Indian Transactions?
Financial due diligence (FDD) is the process of independently verifying a business’s financial performance and financial position before a deal closes. It covers historical performance especially quality of earnings, working capital trends, debt and debt like items and other assets and liabilities of the Target entity.
According to Grant Thornton’s Dealtracker, India recorded over 2,400 M&A and PE transactions in 2025, with total deal value USD 97 billion. Most of such transactions require an FDD. There are also IPOs and qualified institutional placements (QIPs) which also require FDD.
While due diligence has been traditionally conducted by Acquirers/ Investors (called the “buy-side” due diligence), now even the Sellers/ Target entity commission due diligence (called the “sell-side” or “vendor” due diligence). Sell-side or vendor due diligence is usually carried out prior to the identification of potential acquirers/ investors.
Apart from gaining a better understanding of the Target’s business and the assets and liabilities to be acquired, a buy-side FDD enables Acquirers/ Investors to identify issues:
- which are deal-breakers i.e., the issues are so material that they may prevent the transaction from taking place (for example, issues impacting viability of the Target business);
- which may result in an adjustment to the purchase price (for example, impairment of certain assets); or
- which may result in modification of the transaction structure (for example, identification of material contingent liabilities which result in change of the transaction structure from share purchase to asset purchase).
In India, FDD matters for an added reason: the gap between a company’s audited statutory accounts and its actual operating picture is often wider than in more mature markets. Mid-market and promoter-led businesses frequently maintain informal records, have complex related-party structures, or carry undisclosed contingent liabilities.
What Does a Buy-Side Financial Due Diligence Actually Cover?
When an Acquirer commissions FDD, the objective is to validate the Target’s financial story and identify risks before the deal is priced or structured. The core areas of investigation include:
Quality of Earnings (QoE) Analysis: A QoE analysis normalises reported earnings by removing non-recurring revenues, other income and expenses, and owner-specific costs. The adjusted EBITDA figure that emerges is often materially different from what appears in the audited financial statements. A business reporting INR 20 crore in EBITDA may reveal an adjusted figure of INR 14 crore once non-recurring export incentives and related-party service fees are stripped out.
Working Capital Assessment: The working capital assessment included analyses of receivables ageing, inventory levels, and payables cycles to establish a normalized working capital baseline. Deviations from this baseline at closing often lead to price adjustments, which is why this analysis must be rigorous.
Debt and Off-Balance-Sheet Liabilities: Buyers look for financial obligations that do not appear on the face of the balance sheet, including supplier advances, personal guarantees, contingent liabilities from pending litigation, and lease commitments.
Tax Position and Contingent Tax Liabilities: GST notices, transfer pricing adjustments, and direct tax disputes are common findings in Indian FDD. Buyers need to quantify these exposures before determining deal structure. In certain cases, a specialist tax due diligence may be conducted to identify such items which are then also incorporated in the FDD report.
Related-Party Transactions: Transactions between the Target and its promoters and their relatives, subsidiaries, or associated entities are examined for commercial rationale, arm’s-length pricing, and potential cash leakage.
Pierag’s Deals Advisory practice conducts buy-side FDD across manufacturing, technology, healthcare, and financial services transactions, covering all of these areas in a single integrated review.
How Should Sellers Prepare for Financial Due Diligence?
Preparation is where sellers consistently underestimate the process. Most sellers assume that having audited financial statements are enough. They are not.
Build a Structured Data Room: A well-organized virtual data room (VDR) accelerates the FDD timeline and reduces the number of information requests raise by the Acquirers. Sellers should organize information by year, separate statutory from management accounts, and pre-load supporting schedules for revenue, expenses, receivables, and payables.
Reconcile Management Accounts with Statutory Accounts: This is the single most common issue found in Indian transactions. When management accounts show different revenue or expense figures than the statutory audit, it immediately raises questions about the reliability of financial information. Sellers need to document and explain every reconciling item even before such information is requested by the Acquirer’s advisors.
Consider Vendor Due Diligence: Vendor Due Diligence (VDD) is a proactive FDD exercise commissioned by the Sellers and made available to prospective buyers. It allows the Sellers to identify problems before buyers do, address them, and present a pre-validated financial narrative. Sellers who use VDD typically experience shorter due diligence periods and fewer late-stage valuation disputes.
Resolve Tax Exposures in Advance: Outstanding GST notices, unresolved TDS demands, or open transfer pricing assessments create uncertainty that buyers will price conservatively. Resolving or quantifying these exposures before the process begins puts the Sellers in a stronger negotiating position.
Pierag’s Accounting Advisory team works with sellers to align financial records, close reporting gaps, and build the documentation needed to withstand scrutiny.
What Are the India-Specific Regulatory Considerations in Financial Due Diligence?
India’s regulatory environment adds dimensions to FDD that do not exist in most other markets. Every buyer’s advisor needs to assess these areas:
FEMA and RBI Compliance For cross-border transactions involving foreign investment, FEMA 20R compliance is a mandatory review area. This includes checking whether the target has obtained required approvals, filed Form FC-GPR, and priced shares in accordance with prescribed valuation norms.
GST Compliance GST liability exposure is a material FDD risk for businesses in manufacturing, retail, logistics, and services. Buyers look for unreconciled GST returns, input tax credit (ITC) mismatches, and pending departmental notices.
Transfer Pricing For businesses with related-party cross-border transactions, transfer pricing documentation under Section 92 to 92F of the Income Tax Act is a significant area of review. Inadequate documentation creates exposure to retrospective adjustments.
SEBI Regulations For listed companies or pre-IPO transactions, SEBI’s LODR (Listing Obligations and Disclosure Requirements) regulations govern disclosure obligations that directly affect what financial information must be available and how it must be presented.
Pierag’s Business Risk Advisory team supports both buyers and sellers in assessing regulatory compliance exposure as part of a broader transaction risk review.
Takeaway: Regulatory risk in India is not a checkbox. It is a quantifiable financial exposure that must be assessed and priced into every deal.
What Are the Most Common Red Flags Found in Indian Financial Due Diligence?
Experienced advisors see patterns across transactions. The following issues appear consistently:
- Revenue concentration: More than 30 to 40 per cent of revenue from a single customer or related party is a commercial and continuity risk.
- Divergence between statutory and management accounts: Unexplained differences of 5 per cent or more in revenue or EBITDA between the two sets of accounts are a serious reliability concern.
- Unreconciled inter-company balances: Complex group structures with unresolved inter-company receivables or payables often indicate cash flow management issues or undisclosed related-party exposures.
- Aggressive revenue recognition: Revenue booked before delivery, or milestone-based revenue not tied to contractual obligations, inflates reported earnings.
- Undisclosed contingent liabilities: Pending litigation, bank guarantees, and disputed tax demands that do not appear in financial notes are a frequent source of post-deal disputes.
- Unwillingness to share information: It has been noticed in a number of transactions that the Sellers/Target is unwilling to share full information with the due diligence team resulting in distrust between the Acquirers and the Sellers. This has also resulted in some transactions being called off as the Acquirers did not get sufficient comfort over financial numbers of the Target.
Frequently Asked Questions on Financial Due Diligence in India
Q1: What is the typical timeline for financial due diligence in India? For mid-market transactions, FDD typically takes four to eight weeks from the initial data request to delivery of a final report. Large or cross-border deals may take twelve weeks or more. Sellers with organized records and a structured data room can shorten this timeline meaningfully.
Q2: Is financial due diligence mandatory for M&A transactions in India? FDD is not mandated by statute but it is standard practice for PE firms, institutional investors, and foreign acquirers. For listed company transactions, SEBI disclosure requirements create overlapping obligations. Boards of directors increasingly treat FDD as a fiduciary responsibility regardless of formal mandate.
Q3: What is the difference between buy-side and sell-side due diligence? Buy-side FDD is commissioned by the Acquirer to independently verify the target’s financials. Sell-side or VDD is commissioned by the Sellers to produce a pre-validated financial assessment that can be shared with multiple buyers. VDD gives sellers control over the process and reduces last-minute surprises.
Q4: How does working capital affect deal pricing in India? Working capital is typically defined as a benchmark in the sale and purchase agreements. If actual working capital at closing differs from the agreed peg, a price adjustment mechanism applies. Disputes over the working capital calculation are among the most common sources of post-deal conflict in Indian transactions, which makes robust analysis at the FDD stage critical.
Q5: What should a startup or high-growth company prepare for investor due diligence? Startups should ensure MIS reports are consistent with statutory filings, cap tables are current and legally clean, GST and TDS compliance is up to date, and any related-party transactions are documented with a clear rationale. Investors will also examine burn rate, revenue recognition policies, and deferred revenue schedules closely.
