LCI Consulting
Business Due Diligence
Review Manual
Version 0.1
Business Due Diligence Review
1 | Financials
Documents to Collect:
 Audited financial statements (last 3-5 years)
 Profit and loss statements (last 3 -5 years)
 Balance sheets (last 3 – 5 years)
 Cash flow statements (last 3 -5 years)
 Tax returns (last 3-5 years)
 Bank statements (last 3-5 years)
 Accounts receivable reports
 Accounts payable reports
 Budget, forecasts and financial projections
 Fixed asset register
 Capital expenditure reports
 Inventory valuation reports
 Debt and loan agreements
 General ledger account reconciliations
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Business Due Diligence Review
1 | Financials
Review Points:
1.1 | Audited Financial Statements
 Are the financial statements accurately prepared and lodged?
 Are there any audit issues or qualifications of accounts?
1.2 | Profit & Loss Statements
 What is the revenue growth trend over the past 5 years? Is it growing, flat or
declining? What factors are driving revenue growth?
 What are the major revenue sources and what contribution do they make to total
revenue?
 How concentrated or diversified are the revenue sources? Is revenue heavily
dependent upon a single product/service or customer?
 How stable and consistent are the different revenue sources over the 5-year period?
Are there any adverse trends or declines in any revenue line?
 What is the expense growth over the past 5 years? Are expenses growing faster than
revenue?
 What are the fixed and variable cost components of the business?
 What is the business breakeven profit point? What is current profit versus breakeven?

What are the major expense categories and cost drivers? What proportion of total
expenses do they contribute?
 What is the cost/income ratio? How does it compare to industry peers?
 What is the net operating margin? Is the net operating margin positive and
sustainable? Is the profitability trend steady, growing or declining?
 Are there any abnormal items that may distort the true operating profitability?
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Business Due Diligence Review
1 | Financials
Review Points:
1.3 | Balance Sheet Statements
 Are all assets properly recorded and valued correctly?
 Check for any overstatement assets or understatement of liabilities?
 Has an asset impairment test been calculated to validate viability of business?
 What is the trend in business liquidity and solvency over time?
 Are there any significant changes in working capital?
 Are there contingent liabilities or off-balance-sheet obligations?
 Are there proper account reconciliations prepared for all GL accounts?
 Are there accurate supporting schedules and documentation for GL accounts?
 Conduct the following financial analysis and ratios:
Liquidity Ratios:
o Current Ratio = Current Assets / Current Liabilities
o Quick Ratio = (Current Assets - Inventory) / Current Liabilities
o Cash Ratio = Cash & Equivalents / Current Liabilities
Solvency Ratios:
o Debt-to-Equity Ratio = Total Liabilities / Shareholder’s Equity
o Interest Coverage Ratio = EBIT / Interest Expense
o Debt Ratio = Total Debt / Total Assets
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Business Due Diligence Review
1 | Financials
Efficiency Ratios:
o Asset Turnover Ratio = Net Sales / Average Total Assets
o Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
o Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Profitability Ratios:
o Return on Assets (ROA) = Net Income / Total Assets
o Return on Equity (ROE) = Net Income / Shareholder’s Equity
Capital Efficiency:
o Return on Invested Capital = Net Operating Profit After Taxes / Invested Capital
o Capital Expenditure Ratio = Capital Expenditures / Revenue
1.4 | Cashflow Statements
 What are the projected cashflow forecasts and how do they track to actual?
 Is the company generating positive operating cash flow?
 Are there significant discrepancies between net income and operating cash flow?
 What are the major sources and uses of cash?
 Are there any unusual or non-recurring cash inflows or outflows?
 What are the cashflows from operating, investing and financing activities?
 Is the company reliant on financing activities for cash flow stability?
 How does free cash flow trend over time? Is it increasing, stable or declining?
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Business Due Diligence Review
1 | Financials
 Conduct the following financial analysis and ratios:
Cash Flow Ratios:
o
Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities
o
Cash Flow to Debt Ratio = Operating Cash Flow / Total Debt
o
Free Cash Flow = Operating Cash Flow - Capital Expenditures
o
Cash Conversion Cycle = Days Inventory Outstanding + Days Sales
Outstanding - Days Payable Outstanding
1.5 | Tax Returns
Documents to Collect:
 Corporate tax returns (last 3-5 years)
 Tax compliance reports
 Correspondence with tax authorities
 Sales tax, and GST filings
 Payroll tax filings and compliance records
 Tax planning strategies, advice and documentation
 Records of any ongoing tax disputes or audits
 Copies of any tax rulings
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Business Due Diligence Review
1 | Financials
Review Points:
 Have all tax returns been completed and lodged on time?
 Are there any tax liabilities or outstanding tax issues?
 Are there any outstanding tax liabilities or disputes?
 Are tax positions and deductions well-documented and justifiable?
 Has the company undergone any tax audits or assessments?
 Are payroll taxes, GST, and sales tax properly calculated and paid?
 Are all tax liabilities adequately provisioned for?
 Are there any tax incentives, credits, or deductions the company benefits from?
 Are there any R&D deductions and are they properly substantiated?
 Are there any international tax exposures or transfer pricing issues?
 Conduct the following financial analysis and ratios:
Tax Efficiency Ratios:
o
Effective Tax Rate = Total Tax Expense / Pre-Tax Income
o
Tax Burden Ratio = Net Income / EBIT
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Business Due Diligence Review
1 | Financials
1.6 | Bank Accounts
Documents to Collect:
 List of all company bank accounts (domestic and international)
 Bank statements (last 2 years)
 Bank reconciliations (for the last 2 years)
 Signatory authorisation and access controls
 Details of any overdraft, loans or credit facilities
 Foreign currency accounts and transactions records
Review Points:
 Have all bank reconciliations been completed and reviewed?
 Are there any discrepancies or unusual reconciling items outstanding?
 Are all bank accounts properly recorded in the financial statements?
 Are there any unauthorised or unusual transactions?
 Is there evidence of proper bank reconciliations being performed regularly?
 Are there clear internal controls over bank account access and usage? Check that:
o
o
o
o
Separation of accountabilities exist between staff involved in cash and
banking related activities.
Cheques and payments are signed off by two signatories
Lists of authorised signatories are compete and up to date
Appropriate bank account access and limits are established
 Are there any outstanding overdrafts or loans attached to bank accounts?
 Are foreign currency accounts subject to any exchange rate risks?
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Business Due Diligence Review
1 | Financials
1.7 | Accounts Receivable
Documents to Collect:
 Accounts receivable aging reports
 Customer credit policies and agreements
 Bad debt reserves and write-offs
 Collections reports and policies
 Reconciliation reports for accounts receivable
 Historical trends in receivables turnover
Review Points:
 What is the composition of accounts receivable (e.g., key customers, industries)?
 Are there any overdue or doubtful accounts?
 What percentage of receivables is past due, and for how long?
 Are credit policies being followed effectively?
 What is the trend in accounts receivable turnover?
 What is the average number of days to collect? How is the trend?
 How is the company managing collections and bad debt write-offs?
 What is amount and percentage of accounts written off each year?
 Are doubtful debts adequately provisioned?
 Conduct the following financial analysis and ratios:
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Business Due Diligence Review
1 | Financials
Accounts Receivable Ratios:
o
Accounts Receivable Turnover = Net Credit Sales / Average Accounts
Receivable
o
Days Sales Outstanding = (Accounts Receivable / Total Credit Sales) × 365
o
Bad Debt Ratio = Bad Debt Expense / Total Credit Sales
1.8 | Accounts Payable
Documents to Collect:
 Accounts payable aging reports
 Supplier contracts and payment terms
 Outstanding invoices and payment schedules
 Reconciliation reports for accounts payable
 Historical trends in payables turnover
 Cash flow projections related to payables
Review Points:
 What is the composition of accounts payable (e.g., key suppliers, industries)?
 Are payments being made on time or are there overdue amounts?
 Are there any disputes or outstanding issues with suppliers?
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Business Due Diligence Review
1 | Financials
 What are the company's payment terms, and how do they compare with industry
norms?
 How does the company manage cash flow concerning accounts payable?
 What is the trend in accounts payable turnover?
 Are there any unrecorded liabilities or potential hidden obligations?
 Conduct the following financial analysis and ratios:
Accounts Payable Ratios:
o
Accounts Payable Turnover = Cost of Goods Sold / Average Accounts Payable
o
Days Payable Outstanding = (Accounts Payable / Cost of Goods Sold) × 365
o
Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding
- Days Payable Outstanding
1.9 | Budget, Forecasts & Financial Projections
Documents to Collect:
 Annual budgets (past 3-5 years)
 Financial forecasts and projections
 Variance analysis reports
 Assumptions used in financial modeling
 Strategic plans and market analysis
 Capital expenditure budgets
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Business Due Diligence Review
1 | Financials
Review Points:
 Are budget assumptions reasonable and supported by historical trends?
 How accurately has the company forecasted financial performance in the past?
 What are the key drivers and risks in financial projections?
 Is there consistency between budgets and actual financial performance?
 Are revenue growth projections realistic based on market conditions?
 How does the company account for unexpected expenses and contingencies?
 Are capital expenditures aligned with strategic business goals?
 What sensitivity analysis has been performed on financial forecasts?
 Conduct the following financial analysis and ratios:
o
Budget Variance = (Actual - Budgeted) / Budgeted
o
Forecast Accuracy = 1 - (Absolute Variance / Forecasted Value)
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Business Due Diligence Review
1 | Financials
1.10
| Fixed Assets
Documents to Collect:
 Fixed asset register
 Depreciation schedules
 Property, plant, and equipment (PPE) valuation reports
 Capital expenditure reports
 Insurance policies covering fixed assets
 Maintenance records and schedules
 Asset disposal records
Review Points:
 Are all fixed assets recorded and valued in accordance with accounting standards?
 What is the condition of the company's physical assets?
 Are depreciation methods and schedules reasonable and consistently applied?
 Are there any obsolete, underutilised, or impaired assets?
 Are there any discrepancies between recorded assets and physical inventory?
 What is the capital expenditure policy, and is it aligned with business strategy?
 Are there any leased assets that should be classified differently for accounting
purposes?
 How does the company manage asset maintenance and replacement planning?
 Are there any liens or encumbrances on fixed assets?
 Have any significant asset disposals occurred, and were they handled appropriately?
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Business Due Diligence Review
1 | Financials
1.11
| Inventory
Documents to Collect:
 Stock inventory reports for the past 2 years
 Inventory purchase orders for the past 2 years
 Inventory stock take reports for the past 2 years
Review Points:
 Are there any obsolete, damaged, or impaired inventory items?
 Are there any discrepancies between recorded inventory and physical inventory?
 Conduct the following financial analysis and ratios:
o
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Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
| Debt & Lending
Documents to Collect:
 Loan documents and contracts
 Loan statements for the last 2 to 3 years
Review Points:
 Are all loans and lending liabilities properly recorded in financial accounts?
 Has the company kept up all loan repayments and debt commitments?
 Review interest rates, fees, conditions and loan term for all loan contracts.
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Business Due Diligence Review
1 | Financials
1.13
| Business Valuation
Valuation Methods:
1. Asset-Based Valuation:
o Determines the company's value based on net asset value.
o Formula: Total Assets - Total Liabilities.
o Best for asset-heavy industries but may not reflect future earnings potential.
2. Discounted Cash Flow (DCF) Analysis:
o Estimates the present value of future cash flows using a discount rate.
o Formula: PV = Σ (Future Cash Flows / (1 + Discount Rate)^n).
o Suitable for companies with strong, predictable cash flows.
3. Market-Based Valuation:
o Compares the company to similar businesses that have been sold.
o Uses Price-to-Earnings (P/E), Price-to-Sales (P/S), and Enterprise Value to
EBITDA (EV/EBITDA) multiples.
o Highly dependent on industry trends and market conditions.
4. Earnings-Based Valuation (Multiple of EBITDA):
o Multiplies the company's earnings before interest, taxes, depreciation, and
amortisation (EBITDA) by an industry multiple.
o Formula: Business Value = EBITDA × Industry Multiple.
o Commonly used in M&A transactions for operationally profitable businesses.
5. Liquidation Value:
o Determines the net cash a company would generate if all assets were sold and
liabilities paid off.
o Best for distressed companies or exit planning.
6. Replacement Cost Valuation:
o Determines how much it would cost to build a similar business from scratch.
o Useful for insurance assessments or highly specialized businesses.
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Business Due Diligence Review
2 | Legal & Compliance
Documents to Collect:
 Business registration and incorporation documents
 Corporate governance records (e.g., board minutes, shareholder agreements)
 Regulatory licenses and permits
 Company share register and records of shares and options issued
 Contracts with suppliers, customers, and partners
 Litigation history and pending legal matters
 Environmental and compliance reports
 Data protection and privacy policies
Review Points:
 Are there legal contract agreements for all major business commitments and activity?
 Are there any ongoing or past legal disputes?
 Is the business compliant with all company reporting and compliance requirements?
 Are Board meetings properly recorded and managed?
 Are all necessary licenses, registrations and permits in place?
 Check share register correctly recorded and updated for all share rights and issues.
 Is there appropriate governance control and oversight over business?
 Is the company compliant with local and international laws?
 Are key contracts favorable and enforceable?
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Business Due Diligence Review
3 | Operations
Documents to Collect:
 Organisational structure and reporting lines
 Business process workflows and procedures
 Supply chain and logistics reports
 Quality control policies and procedures
 Key vendor and supplier agreements
 Business continuity and disaster recovery plans
Review Points:
 Are all operational processes and policies documented?
 How efficient and effective are the operational processes?
 Are there any supply chain risks or issues?
 What are the key operational bottlenecks and dependencies?
 Are there any critical dependencies or high concentration risks with suppliers?
 Are all products and processes compliant with industry and safety standards?
 Are proper work health and safety controls and measures in place?
 What governance and reporting practices exist to manage quality and safety?
 Are there measures in place for process quality and improvement?
 Are business continuity plans and protocols in place to prevent business disruption?
 Are regular maintenance and inspection reviews conducted on operational
equipment and processes to ensure continuity and consistency of operations?
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Business Due Diligence Review
4 | Products & Services
Documents to Collect:
 Product and service catalogs and pricing structures
 Production processes and supply chain documents
 Sales performance and market analysis reports
 R&D investment and innovation pipeline
Review Points:
 What is the product/service point of differentiation or competitive advantage?
 What is the sales performance trend and market share over time?
 What are the costs and margins for each product/service?
 What are the risks in product quality or delivery?
 How does the company’s products/services compare to competitors?
 Is there potential for expansion or innovation?
 Does the company invest in R&D and product innovation to remain competitive?
 Where do the company products sit on the product maturity lifecycle?
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Business Due Diligence Review
5 | Customers & Market Competitiveness
Documents to Collect:
 Customer database and key client contracts
 Market analysis and competitive landscape reports
 Customer feedback and satisfaction reports
 Marketing and branding strategies
Review Points:
 Who are the top customers, and how dependent is the business on them?
 What proportion of customers are committed contractually to the business.
 What is the customer churn rate?
 Is the company growing or losing customers?
 What is the average spend per customer and lifetime value?
 What are the key market trends affecting the business?
 Is the market/industry growing or declining?
 What are the barriers to entry in the market?
 Is the market competitive and how concentrated is it?
 Is the company and industry at risk of disruption from competitors?
 How is the company positioned competitively in the market?
 What is the company’s share of the market? Is it growing or shrinking?
 How strong is the company’s brand and market position?
 How does the company rate on customer service and satisfaction?
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Business Due Diligence Review
6 | Intellectual Property
Documents to Collect:
 Patents, trademarks, and copyrights
 Trade secret protection policies
 Licensing agreements
 Intellectual property litigation history
Review Points:
 Are all intellectual property assets properly protected and secured?
 Are all intellectual property assets properly valued and recorded in accounts?
 Are there risks of IP infringement or theft?
 Are there any pending IP disputes or litigation?
 What is the commercial value of the company’s IP?
 Are all trademarks, patents and proprietary IP assets adequately protected?
 Are licensing agreements in place for all users of IP assets?
 Are proper security and access controls and protocols in place to protect trade
secrets and IP asset development?
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Business Due Diligence Review
7 | Human Resources
Documents to Collect:
 Employee contracts and employment offer letters
 Organisational chart with key roles and personnel
 Employee handbook and HR policies
 Benefits and compensation plans
 Employee performance evaluations
 Staff turnover reports
 Workplace safety policies
 Employee disciplinary action reports and correspondence
Review Points:
 Are employment contracts signed and legally compliant?
 Is the compensation structure competitive and legally compliant?
 Are staff correctly paid their employment remuneration and entitlements?
 Are there any key personnel risks – i.e. staff business relies on heavily?
 What is the level of employee satisfaction and turnover?
 Are there any ongoing HR-related disputes or claims?
 Are staff properly trained on company policies and procedures?
 Is there a HR policy compliance and governance model in place?
 Are there adequate employee work safety measures in place?
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Business Due Diligence Review
8 | IT & Systems
Documents to Collect:
 IT infrastructure overview and schematic
 Software and technology application catalog
 Software application licenses
 Cybersecurity policies and measures
 IT service agreements and vendor contracts
 Data backup and recovery plans
 IT compliance reports (e.g., GDPR, SOC 2, HIPAA)
Review Points:
 Are IT systems up to date and secure?
 Are there cybersecurity control measures in place to protect it systems from
vulnerabilities and breaches?
 Is there a robust business continuity plan in place to protect from system outages
and data breaches?
 Are all software application licenses up to date and business usage compliant?
 Are there any redundant or non-supported application software licenses?
 Are company IT hardware assets modern and sufficient for ongoing business needs?
 Is the IT infrastructure reliable and scalable for future growth and needs?
 How well is data backed up and protected?
 Are there IT service provider contract agreements in place?
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Business Due Diligence Review
9 | Property & Premises
Documents to Collect:
 Lease contracts and correspondence
 Property deeds and titles
 Site plans and zoning permits
 Environmental assessments and reports
 Property tax records
 Maintenance and repair records
 Utility bills and service agreements
 Health and safety compliance certificates
Review Points:
 Does the business own or lease its premises, and are lease terms favorable? Are there
any outstanding loans or encumbrances on the property assets?
 If premises leased, what is the remaining term of lease and are there options to
extend?
 What liabilities and obligations are contained within the lease contracts with regard
to rent reviews, outgoings, repairs & maintenance and make good?
 Are there any zoning or land use restrictions?
 Are there any proposed zoning or development applications that may affect the
business property or operations?
 Are there any pending property disputes or liabilities?
 Is the property adequately maintained and compliant with health and safety
regulations?
 Are there significant renovation or repair costs anticipated?
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Business Due Diligence Review
10 | Insurance
Documents to Collect:
 Insurance policies and certificates of currency including:
o
o
o
o
o
o
o
o
Business property, stock and assets
Business interruption
Workers compensation
Professional indemnity
Public liability
Management (directors & officers) liability
Product liability
Cyber
 Insurance claims documentation and correspondence over the last 5 years including
paid, declined and outstanding claims
 Insurance broker and provider agreements and details
Review Points:
 Are all necessary insurance policies in place and up to date?
 Are there any gaps or shortfalls in insurance policy cover?
 What are the policy coverage limits and exclusions?
 Are there any outstanding or pending insurance claims?
 Are the insurance policies aligned with business risks and industry standards?
 Are the current business practices compliant with insurance policy limits and
inclusions?
 Are all incidents properly reported and recorded for insurance purposes?
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