What EY diligence actually asks for

Founders picture due diligence as an audit: someone checking whether the numbers are correct. It does not work that way. A Big 4 diligence team is not asking whether your numbers are right. They are asking whether the earnings you are selling are real, repeatable, and worth what you say.

I sat on the prepared side of that process. On a PKR 1.2 billion, about US$8 million, Series A, I owned the valuation, the five-year model, the investor materials and the data room while EY ran financial due diligence. This is what they asked for, which findings moved the price, and how I would prepare a company before the process opens.

Diligence is not an audit

Financial due diligence rests on three pillars: quality of earnings, net working capital, and net debt. An audit gives an opinion on whether historical statements comply with a standard. Diligence tests something more commercial: whether the earnings you are selling will last, whether the business needs more or less cash to run than it looks, and what obligations reduce the equity a buyer is actually acquiring.

Every request a diligence team makes maps back to one of those three questions. Once you see that, the process stops feeling like an interrogation and starts feeling like a checklist you can get ahead of.

The request that lands in week one

Within days of signing an NDA, the list arrives. For a Series A it covers:

• Three to five years of income statements, balance sheets and cash-flow statements
• The most recent management accounts, month by month
• Audited financials where they exist, and tax and Zakat returns
• The trial balance and general-ledger detail
• Accounts receivable and payable ageing schedules
• Payroll records and every debt schedule

How fast and how cleanly you produce that list is itself a signal. A company that takes three weeks to assemble five years of numbers has told the diligence team something before they read a single figure. On my raise, the data room was already built when the request came, and that changed the tone of the whole engagement.

Quality of earnings: build the bridge before they do

Quality of earnings is where most of the work happens, close to a third of the whole exercise. The team takes your reported EBITDA and strips out everything that will not last: one-off items, non-cash entries, owner-specific costs, revenue booked in the wrong period. What remains is the run-rate earnings a buyer is really paying a multiple on.

You want to build that adjusted-EBITDA bridge yourself, before they build it for you. Normalise owner compensation to a market salary. Restate related-party rent and supply deals to market terms. Move revenue to the period it belongs in. Document every add-back with evidence a stranger can follow.

The cash impact is the part founders miss. Diligence teams disallow somewhere between 10 and 30 percent of the add-backs a seller proposes, and the purchase multiple magnifies every rejected one. At a 6x multiple, 200,000 dollars of add-backs that fail testing removes about 1.2 million dollars of enterprise value. An add-back you cannot defend does more than get rejected. It makes the team doubt the rest of your adjustments and widen their scope.

The working-capital peg: the price lever you never saw coming

This finding surprises founders most, because it never comes up in the valuation conversation. A buyer expects the business handed over with enough working capital already in it to keep running from day one. So diligence sets a peg, usually the trailing-twelve-month average to smooth out seasonality. At closing, your actual working capital is compared to that peg, and the price moves to match, with the true-up settled 60 to 90 days after completion.

Founders who stretch payables or pull receivables forward to make cash look healthy before a raise walk straight into this. You cannot dress the balance sheet for the photo, because the peg is an average and the true-up catches the gap. The move that works is the boring one: run clean, predictable working capital for the year before you raise.

Net debt and the obligations that quietly cut your equity

Price is agreed on a cash-free, debt-free basis, so diligence hunts for everything debt-like that reduces what your equity is worth. It reaches well past bank loans: deferred revenue for services you have been paid for but not delivered, accrued but unpaid bonuses, capital leases, unpaid sales or payroll taxes, deferred payments on past acquisitions, customer deposits. Each one comes off the equity value.

Find your own debt-like items first and price them into your ask. The alternative is letting EY find them and reprice the deal around them.

Revenue recognition and run-rate

The team reconciles revenue to cash actually received across three to five years and tests margins by product and by customer. Revenue you recognised on work you have not delivered gets moved out of the period. For any company selling contracts, subscriptions or anything paid up front, an aggressive recognition policy surfaces here, and it always surfaces. Make your recognition defensible before the raise, not during it.

Related-party transactions: restate the family deals

In a founder-run or family-group business, related-party transactions are everywhere: the building owned by the founder, supply from a sister company, a management fee to the holding entity. Diligence restates all of it to market terms, because favourable internal pricing inflates apparent profit. If your margins depend on a cousin charging half the market rent, the adjusted numbers show it. Know what your business looks like at arm's length before someone else calculates it.

The GCC layer the US guides skip

Every quality-of-earnings guide online is written for a US deal and stops at the water's edge. A Saudi raise carries four exposures those guides never mention, and a diligence team working the Kingdom will test each one.

Zakat. A company wholly owned by Saudi or GCC nationals pays Zakat at 2.5 percent of the Zakat base rather than corporate income tax. Mixed ownership carries both: the foreign share taxed at the 20 percent corporate rate, the Saudi and GCC share assessed to Zakat. A wrong Zakat base, usually caused by weak accounts-payable records that understate liabilities, is both a Zakat exposure and a lost-input-VAT exposure, and diligence flags both.

End-of-service. Every employee is owed an end-of-service benefit: half a month's wage for each of the first five years, a full month for each year after. Under IFRS this requires an IAS 19 actuarial valuation as a defined-benefit obligation. Companies that treat it as a footnote are carrying an undisclosed liability, and it comes straight off equity when diligence quantifies it.

GOSI. Social-insurance contributions sit alongside end-of-service as a separate obligation. Confuse the two or double-count them and you lose credibility on the exact numbers you most need to be right.

VAT and ZATCA. Saudi VAT runs at 15 percent, and ZATCA reviews corporate income tax, Zakat, withholding tax and VAT together. Any open assessment becomes a contingent liability in the data room, and an unresolved ZATCA matter can hold a deal until it is cleared.

Build the data room so diligence accelerates

By Series A, investors expect more than a folder of PDFs. Alongside the financials they want cohort analysis, customer references, board-deck history, and every material contract, plus the corporate spine: the cap table with share classes, incorporation documents, the shareholders' agreement, the list of subsidiaries, the org chart, and the IP schedule. Structure it so a diligence associate finds any document in under a minute. Every hour they spend chasing a file is an hour they spend wondering what else is missing.

The findings that stall deals

Some issues do more than cost price. They stop the clock. Add-backs that fail testing, because they make the team question management. A widening gap between EBITDA and operating cash flow. Receivables past 90 days and climbing. Payables stretched right before the sale. Inventory reserves untouched for years. Revenue concentrated in two or three accounts. An unpaid or disputed tax assessment sitting open. Each has an answer, and the answer lands better when it is ready before the question is asked.

What I would run before opening the process

A short, honest pre-diligence pass, four to six weeks before you invite anyone in:

1. Build your own adjusted-EBITDA bridge and document every add-back to a standard a stranger would accept.
2. Run clean working capital for the trailing year, and know your likely peg.
3. List every debt-like item and price it into your ask.
4. Get your Zakat base, your end-of-service obligation under IAS 19, and any open ZATCA matter valued and resolved.
5. Build the data room to the Series A standard, then time how long it takes a colleague to find three random documents.

Do this and diligence becomes confirmation rather than discovery. The deals that close on the founder's terms are the ones where the finance work was finished before the investor asked, not scrambled together while the raise waited.

I have sat on the prepared side of a Big 4 process and run the workstream that kept it moving. If you have a raise coming and want the finance side ready before diligence starts, tell me where you are.

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General guidance from experience, not investment or tax advice. Zakat, GOSI, end-of-service and VAT positions should be confirmed with your own advisers against current regulation.