skills/due-diligence/references/financial-and-integration.md

# Financial diligence and integration

## Quality of earnings

Reconcile reported results to underlying accounts and cash where access permits. For each proposed normalization, record amount, period, source, reason, whether it recurs, buyer cost after close, and acceptance status. Keep reported, seller-adjusted, and diligence-adjusted earnings distinct.

Test both add-backs and omitted ongoing costs: owner compensation, related-party terms, missing functions, recurring “one-off” expenses, timing differences, exceptional revenue, and underinvestment. A large adjustment is a reason to inspect its basis, not proof of manipulation. Avoid applying a valuation multiple to an adjustment already reflected elsewhere in the forecast.

## Working capital and cash

Define operating working capital for the transaction and reconcile the relevant accounts. Inspect aging, collectability, inventory quality, payment timing, seasonality, and unusual pre-close actions. A normalized peg should reflect the business and negotiated definition; a trailing average alone may misrepresent seasonal or rapidly growing needs.

Bridge delivered working capital to the agreed peg and explain contractual price treatment. Separate maintenance from growth capex and identify deferred investment. Reconcile EBITDA, taxes, capex, working-capital changes, and free cash flow using consistent definitions. Cash conversion requires an explanation in context, not a universal percentage threshold.

Review debt-like items, cash-like items, contingent liabilities, leases, and other sources-and-uses adjustments under the agreed transaction convention. Do not count the same liability in both debt and operating working capital. Test the peak funding requirement, not only annual totals.

## Synergies and integration

For each synergy, state its mechanism, baseline, gross benefit, recurring cost, one-time implementation cost, timing, dependency, owner, and supporting evidence. Separate cost reductions, released capacity, revenue, and incremental contribution. Eliminate overlap with standalone forecasts and other initiatives.

Test customer response, cross-selling eligibility, churn during integration, delivery capacity, systems compatibility, and leadership attention. Apply scenario-specific assumptions based on evidence. Do not impose a blanket haircut on revenue synergies or assume cost synergies arrive on management's preferred schedule.

Connect the integration plan to deal conditions and valuation. Day 1 priorities include service continuity, payment and payroll capability, required approvals, operational access, key-person coverage, customer communication, and incident ownership as applicable. Later work may include systems consolidation, operating-model changes, and benefit realization. Distinguish a drafted plan from evidence that readiness or approvals are complete.

## Synthesis

Show how each material finding changes the underwriting case, price, contractual protection, closing condition, or post-close work. Keep an unresolved register with the test needed and its decision consequence. Use sensitivity for disputed assumptions and avoid layering several discounts for the same exposure. The recommendation should remain intelligible if the reader sees only the first page.