Glossary of financial due diligence terms

German practice keeps many English terms of due diligence. Each entry gives the term in English and German, and what it means.

Financial due diligence (FDD) (Financial Due Diligence (FDD))

The review of a target company's figures before a transaction: earnings, working capital, net debt, cash flow and the plan. Unlike an audit it gives no opinion on the accounts; it finds what matters for the price and the contract. What is a financial due diligence databook?

Vendor due diligence (VDD) (Vendor Due Diligence (VDD))

A due diligence the seller commissions before the sale and hands to the bidders.

Databook

The Excel workbook behind the due diligence report, with every table the report quotes. What is a financial due diligence databook?

Data room (Datenraum)

The secure online folder in which the seller provides the documents of a transaction to the bidders.

Trial balance (Summen- und Saldenliste (SuSa))

Every account of the books with its balance at a date, usually with the opening balance and the period's debits and credits. From the DATEV, BMD or RZL trial balance to the databook

BWA (DATEV management report) (BWA (betriebswirtschaftliche Auswertung))

DATEV's monthly report of statement lines and ratios, built from the same bookings as the trial balance but without the single accounts.

Chart of accounts (SKR03, SKR04, EKR) (Kontenrahmen (SKR03, SKR04, EKR))

The numbering of the accounts: DATEV's SKR03 and SKR04 in Germany, the Einheitskontenrahmen (EKR) in Austria.

HGB and UGB (HGB und UGB)

The commercial codes whose rules the annual accounts follow: Germany's Handelsgesetzbuch and Austria's Unternehmensgesetzbuch.

Cash flow statement (Kapitalflussrechnung (Geldflussrechnung))

The cash flows of a period from operating, investing and financing activities. Under HGB the standard is DRS 21, under UGB the AFRAC statement 36, where it is called the Geldflussrechnung.

Quality of earnings (QoE) (Quality of Earnings (QoE))

The analysis of how much of the reported earnings will recur under a new owner. Quality of earnings: adjusted EBITDA and the EBITDA bridge

Reported EBITDA (Berichtetes EBITDA)

Earnings before interest, taxes, depreciation and amortisation, as booked.

Normalisation (Normalisierung)

An adjustment that corrects the history as booked: a one-off, unusual or non-operating item, or one in the wrong period.

Pro forma adjustment (Pro-forma-Anpassung)

An adjustment that restates the history to the structure the buyer will own, such as a full year of an acquired business.

Adjusted EBITDA (Bereinigtes EBITDA)

Reported EBITDA after the normalisations and the pro forma adjustments: the figure a multiple is applied to. Quality of earnings: adjusted EBITDA and the EBITDA bridge

EBITDA bridge (EBITDA-Brücke)

The walk from reported to adjusted EBITDA, one adjustment per line, each with its reason.

LTM (last twelve months) (LTM (letzte zwölf Monate))

The twelve months up to the latest month-end the books hold, as booked.

Run rate (Run Rate (hochgerechneter Wert))

A short recent period, such as a month or a quarter, scaled up to a year. It is not the LTM, which is twelve months actually booked.

Net working capital (NWC) (Net Working Capital (NWC))

The capital tied up in the day-to-day business: trade receivables and inventories less trade payables, plus other operating assets and liabilities. Net working capital and net debt in M&A

NWC peg (NWC-Peg (Zielwert))

The level of working capital the price assumes; the difference at closing adjusts the price. Net working capital and net debt in M&A

Net debt (Nettoverschuldung)

Financial debt less cash, deducted from the enterprise value on the way to the equity value. Net working capital and net debt in M&A

Debt-like items (Schuldähnliche Posten)

Obligations the buyer pays after closing that are not financial debt, such as pension provisions or taxes owed for past years.

Cash-like items (Zahlungsmittelähnliche Posten)

Assets outside the operating business that turn into cash, such as a receivable from the sale of an asset; they count with the cash.

Enterprise value (Unternehmenswert (Enterprise Value))

The value of the business as if it had no debt and no spare cash, with a normal level of working capital.

Equity value (Eigenkapitalwert (Equity Value))

The price for the shares: the enterprise value less net debt and debt-like items, adjusted for the working capital against the peg.

Locked box (Locked Box)

A price mechanism that fixes the price on a balance sheet drawn up before signing; no value may leave to the seller after that date beyond what the contract permits.

Leakage (Leakage (Wertabfluss))

Value that leaves a locked-box company to the seller after the locked-box date, such as a dividend; the seller pays it back unless it is permitted.

Completion accounts (Closing Accounts (Completion Accounts))

A price mechanism that measures net debt and working capital at the closing date and adjusts the price to them.

Cash conversion (Cash Conversion)

Free cash flow before taxes (EBITDA plus the change in working capital, less capital expenditure) as a share of EBITDA.

Capital expenditure (capex) (Investitionen (Capex))

Spending on fixed assets: maintenance capex keeps the business running, expansion capex grows it.

Current trading (Laufende Geschäftsentwicklung (Current Trading))

The months since the last analysed period, compared with the plan and the prior year, while the deal runs.

Questions

Read next

• What is a financial due diligence databook?
• Quality of earnings: adjusted EBITDA and the EBITDA bridge
• Net working capital and net debt in M&A

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