FDD Glossary: Financial Due Diligence Terms in Plain English

Deal teams throw around terms like normalized EBITDA, working capital peg and locked box as if everyone grew up in a deal room. This glossary defines the terms that come up in every financial due diligence engagement — written by people who run them, not copied from a textbook.

The Core Framework

Financial Due Diligence (FDD): An investigation of a target company's financial position, earnings quality and cash flows before an acquisition, focused on validating what the buyer is actually paying for. See our financial due diligence service page.
Quality of Earnings (QoE): An analysis of how sustainable and repeatable a target's reported earnings are, separating true operating performance from one-off items, owner adjustments and accounting choices. We explain the difference between scopes in light QoE vs full QoE.
EBITDA: Earnings before interest, tax, depreciation and amortisation. The most common profit measure in mid-market M&A, and the basis of most valuation multiples.
Normalized EBITDA: EBITDA adjusted for one-off items, owner remuneration at market rates, and non-recurring costs, so it reflects the earnings a buyer can expect to repeat.
EBITDA Addbacks: Adjustments proposed by the seller to increase EBITDA — one-off costs, personal expenses run through the business, above-market owner salaries. Every addback should be tested, not accepted. We catalog the common ones in our EBITDA addbacks article.
Run-Rate EBITDA: EBITDA expressed at an annualized level reflecting recent performance and known changes, used when the last full year does not represent the current trajectory.
Pro Forma Adjustments: Adjustments that model events as if they had already happened — a completed acquisition, a lost customer, a planned cost reduction.
Quality of Revenue: An assessment of whether reported revenue is sustainable: customer concentration, contract terms, churn, cut-off issues and revenue recognition policies.
Customer Concentration: The share of revenue dependent on the largest customers. High concentration is a valuation risk and a common negotiation lever.

Working Capital & Price Mechanics

Working Capital Peg: The level of net working capital the buyer and seller agree the business needs to operate normally, set as a reference point in the purchase agreement. We cover how pegs are set in our NWC & peg analysis guide and our working capital peg article.
Net Working Capital (NWC): Current assets minus current liabilities (typically excluding cash and debt). Shortfalls or surpluses against the peg at closing usually trigger a purchase price adjustment.
Cash-Free Debt-Free Deal: A deal structure where the seller keeps the cash and repays the debt at closing, so the buyer pays only for the operating business.
Locked Box: A pricing mechanism that fixes enterprise value at a historical balance sheet date, with value accruing to the buyer through a tick-up until closing.
Completion Accounts: Accounts prepared at or shortly after closing to determine final purchase price adjustments, most commonly for net working capital and net debt.
Working Capital True-Up: The purchase price adjustment that settles the difference between actual net working capital at closing and the agreed peg. Disputes here are the most common post-closing argument in mid-market deals.

Engagement Types & Deliverables

Buy-Side Due Diligence: Diligence performed for the buyer, focused on validating the investment case, stress-testing the seller's numbers and identifying risks that should move price or terms. See buy-side due diligence.
Sell-Side Due Diligence: Diligence performed for the seller, aimed at presenting the business accurately and favorably, and removing surprises before they reach a buyer.
Vendor Due Diligence (VDD): Due diligence prepared by or for the seller before a sale process, giving buyers a head start and letting the seller control the narrative on known issues.
Vendor Assistance: Support provided to a seller (or their corporate finance adviser) during a sale: preparing the databook, responding to buyer queries and defending the numbers. See vendor assistance.
Red Flag Report: A short-form diligence deliverable listing the key risks and issues found, without a full databook. Common when timelines are short or scopes are narrow. See our Nordic red flags article.
Databook: A structured analytical workbook (often Excel) summarizing the target's historical financial performance: revenue build, cost analysis, EBITDA bridges and working capital trends. See M&A databooks and our audit-ready databook guide.
Carve-Out: The separation of a business unit from a larger group for sale. Carve-outs require careful cost allocation and standalone cost modelling in diligence. See carve-out & separation services.
Standalone Costs: The costs a carved-out business would incur operating independently, including previously shared services it must now buy or build.

Process & Documents

Data Room: A secure online repository where the seller places financial, legal and commercial documents for buyer review during diligence.
Data Request List: The structured list of financial and operational information an FDD team sends to the seller at kick-off. We publish our actual working list as the due diligence data request checklist.
Letter of Intent (LOI): A non-binding early agreement setting out headline price, structure and terms. The FDD scope is usually set right after the LOI is signed.
SPA (Sale and Purchase Agreement): The binding contract for the transaction. FDD findings feed directly into SPA warranties, indemnities and price mechanisms.
Warranty and Indemnity (W&I) Insurance: Insurance that transfers certain representation risks from the buyer to an insurer. FDD scope and findings influence what the policy covers and excludes.
Deal Contamination: Informal term for the reputational risk a failed or value-destroying deal poses to the executives and advisers who did it. Diligence exists to prevent it.

Nordic & Sweden-Specific Terms

SIE File: Sweden's standard bookkeeping export format (SIE4/SIE5), carrying full transaction and voucher detail. In Swedish deals, working from the SIE export avoids dependence on seller-prepared summaries. See SIE file due diligence.
K2 / K3: Sweden's simplified (K2) and full (K3) accounting standards for smaller companies. They diverge on capitalized development costs, goodwill treatment and lease accounting — differences that move EBITDA. Swedish-language ledgers are our daily work; see our Sweden page.
SAF-T: The Standard Audit File for Tax, a standardized digital accounting export used in Norway (and increasingly across Europe) that carries transaction-level data suitable for diligence.

More detail on Nordic deal work: why founder-led Swedish businesses need different diligence and Xledger vs Visma for Norwegian groups.

Using the glossary

If a term on a deal you are looking at is not here, or you would like an independent view of the numbers behind it, contact Zion Advisor. We run financial due diligence for mid-market deals across the Nordics and beyond — senior-led, first cut in 48–72 hours. You can also browse our insights library for worked examples of these terms in real deal contexts.