AI for Financial Due Diligence: Claude Tools for M&A and Investment Analysis

Financial Due Diligence and AI

Financial due diligence (FDD) in M&A transactions verifies the financial representations in a seller's information memorandum and identifies risks not visible in audited financials. FDD covers quality of earnings (QoE), working capital normalization, revenue quality, EBITDA bridge analysis, debt-like items, and management projection assessment. Claude with ClaudeFinLab accelerates the analytical work across all these workstreams.

Quality of Earnings (QoE)

QoE analysis is the heart of FDD — determining the true, sustainable EBITDA of the business:

• "Perform a quality of earnings adjustment on this EBITDA bridge: reported EBITDA $42.5M. Addbacks claimed by seller: (1) CEO salary above market $1.2M (owner comp adjustment); (2) one-time restructuring charges $2.8M; (3) COVID-related government grants $1.5M; (4) gain on sale of equipment $0.6M; (5) management consulting fees $1.8M (to related party); (6) pro forma for acquired entity $3.2M. Total claimed addbacks $11.1M → adjusted EBITDA $53.6M. Assess each addback: which are defensible and which would a buyer challenge?"
• "Analyze EBITDA trend quality: LTM EBITDA $42.5M. But: year 3 was $38M, year 2 was $44M (anomaly — won large one-time project), year 1 was $36M. Trailing 12 months benefited from a one-time customer migration project ($6.4M revenue, 80% margin). Normalized EBITDA excluding the one-time project? What does the underlying growth trend look like?"
• "Build the EBITDA bridge from reported to 'buyer-adjusted': start with reported EBITDA $42.5M, add/subtract: seller addbacks accepted ($5.8M), seller addbacks rejected ($5.3M), buyer-identified deductions — above-market rent to related landlord ($1.2M below market adjustment reversal), understated accruals ($0.8M), public company cost burden ($2.1M if taken private → removal). Buyer-adjusted EBITDA?"

Revenue Quality Analysis

• "Assess revenue quality for this B2B SaaS company: ARR $28.4M, 420 customers. Customer concentration: top 5 customers = 38% of ARR. Contract terms: 72% on annual contracts (recurring), 18% on multi-year (high quality), 10% month-to-month (churn risk). Net revenue retention 108%. Churn analysis: gross churn 12% by customer count, 8% by ARR (larger customers more sticky). Assess revenue quality on a 1-5 scale."
• "Flag revenue recognition risk: the company recognizes 100% of a multi-year contract upfront if the customer signs a non-cancellable contract. Under ASC 606, is this appropriate? Review: (1) performance obligations — is the entire contract a single PO or multiple? (2) timing — over time or point in time? (3) If recognition is incorrect, what is the deferred revenue adjustment?"
• "Analyze revenue bridge: LTM revenue $142M vs prior year $128M (+10.9% growth). Decompose: organic growth from existing customers $8.4M (+6.6%), new customer revenue $12.2M (+9.5%), churn/downsell ($6.6M, -5.2%). Is the growth quality acceptable for a 12x EBITDA acquisition multiple?"

Working Capital Normalization

• "Compute normalized working capital: trailing 12-month average of: AR $18.4M, inventory $12.2M, other current assets $2.8M, AP ($8.4M), accrued expenses ($6.2M), deferred revenue ($4.8M). Normalized NWC = $14.0M. Seller's proposed closing NWC peg: $16.4M. Is the peg fair? Which line items are inflated?"
• "Analyze working capital seasonality: the business has peak AR in Q4 (holiday season), with Q4 AR typically 30% above average. The deal is closing in October. Seller is arguing for Q4-elevated NWC peg. What is the seasonality-adjusted NWC peg and how much is the Q4 timing worth to the seller?"
• "Identify working capital manipulation risks: (1) AR acceleration — any large payments received just before year-end that normally come in January? (2) Inventory write-offs deferred — are reserves adequate? (3) AP stretching — has vendor payment timing changed in the last 90 days? (4) Accrual holidays — are all bonus and vacation accruals properly recorded?"

Debt-Like Items and Net Debt

• "Identify debt-like items in this acquisition: nominal balance sheet debt $42M (term loan). Additional debt-like items to deduct from equity value: unfunded pension liability $8.4M, deferred revenue (liability for future performance) $6.2M, earn-out obligations $4.5M, operating lease obligations (IFRS 16 / ASC 842) $12.8M, customer deposits (refundable) $1.4M. What is total net debt for enterprise-to-equity value bridge?"
• "Assess off-balance sheet liabilities: company has 12 operating leases not yet on balance sheet (pre-ASC 842 adoption). Minimum future lease payments: Year 1 $2.4M, Year 2 $2.4M, Year 3 $2.4M, Year 4 $1.8M, Year 5 $1.2M, thereafter $2.4M. Discount at 5.5% IBR. What is the operating lease liability to include in net debt?"

Management Projection Assessment

• "Assess management's 5-year projection: revenue CAGR 22% (from $142M to $385M), EBITDA margin expansion from 29.8% to 38.5%. Historical CAGR: 11% revenue, margin has been flat. Key assumptions driving plan: (1) new product launch in Year 2 ($45M revenue); (2) international expansion ($68M revenue by Year 5); (3) automation investment reducing COGS by 600bps. How achievable is this plan? What is the implied multiple on a buyer-adjusted base case?"
• "Build buyer's own base case using conservative assumptions: revenue CAGR 14% (haircut of 8 points from 22%), EBITDA margin expansion 200bps over 5 years (vs 870bps claimed). Compute: Year 5 EBITDA on buyer's case vs management case. At 12x exit multiple, what is the IRR on buyer's base case vs management case?"

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