Financial due diligence is one of the most document-intensive, time-critical processes in business. AI can dramatically accelerate the information gathering and analysis phases while human judgment remains essential for interpretation and decision-making.

Disclaimer: AI assists with analysis but is not a substitute for qualified financial and legal professionals. All critical findings require expert verification.

1. Document Analysis and Extraction

Financial Statement Analysis

Prompt: Analyze these financial statements and identify key findings.

Company: [Target company name]
Period: FY2022, FY2023, FY2024 (full year)
Documents: [Paste or describe the statements]

Analyze and identify:
1. Revenue quality and sustainability
   - Revenue growth rate and trend
   - Revenue concentration (customer/product/geography)
   - Recurring vs. one-time revenue
   
2. Profitability analysis
   - Gross margin trend and comparison to industry
   - EBITDA margin trend
   - Net income quality (cash conversion)
   
3. Working capital and cash flow
   - Days Sales Outstanding (DSO) trend
   - Days Payable Outstanding (DPO) trend
   - Cash conversion cycle
   - Free cash flow vs. reported net income
   
4. Balance sheet red flags
   - Debt structure and covenants
   - Goodwill and intangibles (acquisition history)
   - Off-balance sheet items
   
5. Year-over-year anomalies
   - Any unusual items requiring explanation
   - Changes in accounting policies
   - Non-recurring adjustments

Contract and Agreement Review

Prompt: Review these key contracts and identify material issues for due diligence.

Contract type: [Customer contracts, supplier agreements, leases, IP licenses]
Number of contracts: [X]
Deal context: [Acquisition, investment, partnership]

For each contract category, identify:
1. Material adverse change (MAC) provisions
2. Change of control triggers (consent requirements, termination rights)
3. Automatic renewal or term extension provisions
4. Key exclusivity or non-compete provisions
5. Warranty and indemnification exposure
6. Unusual or non-standard provisions
7. Missing provisions that should be present

Summary format: Highlight material issues only; flag for legal review.

Data Room Index Organization

Prompt: Help me organize a data room review for a target company acquisition.

Target: [Brief description]
Data room contents: [List the folders/documents available]
Deal size: [$X million]
Deal type: [Strategic acquisition / PE buyout / minority investment]
Timeline: [Due diligence period]

Create:
1. Prioritized document review list (what to read first)
2. Red flag document types to look for that are absent
3. Document request list for gaps in current data room
4. Review workplan with estimated time per section
5. Tracker template for findings by category

2. Financial Modeling Review

Quality of Earnings Assessment

Prompt: Help me assess the quality of earnings for this acquisition target.

Context: $45M EBITDA business being acquired at 8x EBITDA ($360M purchase price)
Seller has provided 3 years of financial statements.

Items to analyze for EBITDA adjustments:
- Management fee ($3.2M/year) — would eliminate post-acquisition
- Owner compensation ($1.8M above market rate) — would normalize
- Non-recurring legal settlement ($2.1M) — one-time
- COVID-related government grants ($1.5M in 2022) — non-recurring
- Gain on property sale ($0.8M in 2023) — non-recurring
- Capitalized R&D ($2.3M) — seller capitalizes, we would expense

Calculate:
1. Normalized EBITDA for each year
2. Adjusted multiple we're actually paying
3. Sensitivity: If 20% of adjustments don't materialize, what's our actual multiple?
4. Red flags requiring further investigation
5. Diligence questions to ask about each item

Revenue Model Validation

Prompt: Review this revenue model for reasonableness.

Business: B2B SaaS company
Model assumptions provided by target:
- Current ARR: $12.5M
- Annual growth rate projected: 65% (Year 1), 50% (Year 2), 40% (Year 3)
- Gross margin: 72% (currently), projected 80% (Year 3)
- Churn: 8% annually (stated), declining to 5%
- New logo acquisition: 15 customers/month
- Average ACV: $85K (projected to grow to $110K)

Validate:
1. Are these growth rates achievable given the starting base?
2. Are the margin projections realistic for SaaS at this scale?
3. What retention rate does 8% churn imply? How does this compare to benchmarks?
4. Are the expansion revenue assumptions visible in the model?
5. What are the key driver assumptions I should stress-test?
6. What information would make this model more credible?
7. Red flags in the assumptions

3. Risk Identification

Customer Concentration Analysis

Prompt: Analyze customer concentration risk for this acquisition target.

Revenue breakdown:
- Top customer: $8.2M (18.2% of revenue)
- Top 5 customers: $24.1M (53.6% of revenue)
- Top 10 customers: $34.5M (76.7% of revenue)
- Total revenue: $45M
- 112 total customers

Contract details:
- Top customer: 2-year contract, renews August 2026 (8 months post-close)
- Customers 2-3: Multi-year, renew 2027
- Customers 4-10: Annual, various renewal dates

Analyze:
1. Concentration risk severity (how does this compare to market norms?)
2. What happens to enterprise value if top customer doesn't renew?
3. What information do we need about the top customer relationship?
4. Recommended representations/warranties related to customer contracts
5. Earn-out structure options to address concentration risk

Regulatory and Compliance Risk

Prompt: Identify regulatory risks for this business.

Business: [Brief description — industry, business model, geographies]
Known regulatory environment:
- [List known regulations that apply]
- [Any pending regulatory changes]
- [Any historical compliance issues disclosed]

Assess:
1. Material regulatory risks we should investigate
2. Compliance diligence questions to ask management
3. Regulatory approval requirements for this deal (if any)
4. Representations and warranties we should require related to compliance
5. Indemnification provisions appropriate for identified risks
6. Post-closing regulatory risk management recommendations

Red flag: Are there any regulatory risks that could be deal-breakers?

4. Management Assessment

Management Interview Preparation

Prompt: Help me prepare for management interviews during due diligence.

Company: [Brief description]
Role being interviewed: [CEO / CFO / CTO / Head of Sales / etc.]
Context: Potential acquisition, PE buyout structure, management rollover expected

Prepare interview questions covering:
1. Business model and competitive dynamics (10 questions)
2. Revenue quality and sales process (8 questions)
3. Financial controls and accounting policies (8 questions)
4. Key risks and how management has addressed them (6 questions)
5. People and organizational health (6 questions)
6. Integration and culture (for acquisition context) (4 questions)
7. Ownership and decision-making process (4 questions)

For each question: what a strong answer looks like vs. red flags

Reference Check Framework

Prompt: Create a reference check framework for management due diligence.

Context: We're acquiring a company and considering retaining the CEO and CFO post-acquisition.
References to check: Former colleagues, board members, customers, former employees

Reference check guide:
1. Questions to ask references (15 questions)
2. How to probe for concerns without leading the reference
3. Red flags in reference responses
4. How to interpret what references don't say
5. Background check items beyond professional references
6. What we're most concerned about: [list your specific concerns about the individuals]

5. Valuation Analysis

Comparable Company Analysis

Prompt: Help me build a comparable company analysis framework.

Target: [Description — stage, industry, metrics]
Key metrics:
- Revenue: $45M (TTM)
- EBITDA: $8.1M (18% margin)
- Revenue growth: 22% YoY
- Business model: SaaS with some services

Comparable companies I've identified: [List]
Or: Help me identify the right peer group for:
[Describe target in detail — geography, customer segment, deal size]

Create:
1. Peer selection criteria
2. Metrics to compare (revenue multiple, EBITDA multiple, growth-adjusted)
3. Public company comps with current trading multiples
4. Precedent M&A transactions in this space
5. Valuation range implied by comps
6. Premium/discount factors vs. comps for this specific target
7. Sensitivity table: Value at different multiple assumptions

Synergy Analysis

Prompt: Help me quantify synergies for this acquisition.

Buyer: [Describe the acquiring company]
Target: [Describe the target]
Deal rationale: [Strategic rationale — market expansion, product integration, talent, cost savings]

Identify and quantify:

Revenue synergies:
- Cross-sell opportunities (estimate addressable base × penetration rate × ACV)
- New market access (what does target enable that buyer couldn't do alone?)
- Pricing power improvements

Cost synergies:
- Overlapping functions (HR, Finance, Marketing, IT)
- Shared vendor contracts
- Facilities consolidation
- Technology deduplication

For each:
- One-time cost to achieve the synergy
- Timing (Year 1, Year 2, Year 3)
- Confidence level (High/Medium/Low)
- Risk factors that could prevent realization

Synergy NPV calculation framework (5-year, appropriate discount rate)

6. Deal Structuring Considerations

Purchase Price Adjustment Mechanisms

Prompt: Advise on purchase price adjustment mechanisms for this deal.

Deal: Acquiring a $45M revenue business at $180M enterprise value
Payment: Mix of cash ($150M) and stock ($30M)
Key concerns:
- Revenue may be overstated (booking policy differences)
- Working capital is higher than normal at quarter end (concern about gaming)
- Two key employees we want to retain

Advise on:
1. Working capital peg and normalization methodology
2. Earn-out structure for revenue-related risk (if appropriate)
3. Escrow/holdback for potential misrepresentations
4. Key employee retention structure (retention bonus vs. equity rollover)
5. Representation and warranty insurance considerations
6. What metric(s) should trigger earn-out (revenue, EBITDA, customer retention?)

Note: Final deal structure requires legal and financial advisors. This is analytical framework.

AI dramatically accelerates the analytical and document review phases of due diligence. Teams report 40-60% time savings on document synthesis and model review tasks. The irreplaceable human elements: regulatory expertise, negotiation judgment, and the relationship-based assessment of management quality.