Series B Due Diligence: What Finance Chiefs Need to Have Ready

Why Series B Diligence Is Categorically Different

At Series A, diligence is typically led by the investing partner with support from one or two analysts. The process is often relationship-driven, leans heavily on management presentations, and the data room may be reviewed but rarely forensically interrogated. Revenue recognition policies, working capital movements and tax positions are noted but rarely stress-tested.

At Series B, the investment is large enough that institutional investors typically appoint specialist third-party firms: a financial due diligence provider (often a Big Four or mid-tier advisory firm) to run a quality of earnings exercise, a legal firm to review contracts and liabilities, and sometimes a commercial diligence firm to validate market size and competitive positioning. The CFO is now dealing with professional sceptics whose job is to find problems.

The consequences of gaps are also more severe. At Series B, a revenue recognition inconsistency is not a conversation item; it is a basis for repricing. An undisclosed liability becomes a warranty claim in the subscription agreement. A going concern qualification in prior audited accounts triggers a lengthy explanation process that can stall completion for weeks. The finance chief's role is to eliminate surprises before the diligence team finds them.

The Financial Diligence Workstreams

The financial diligence adviser will typically run four interconnected workstreams. Understanding what each one is looking for helps you prepare the right materials in advance.

Quality of Earnings (QoE)

The QoE exercise is the centrepiece of financial diligence. Its purpose is to identify the difference between reported revenue and EBITDA and the sustainable, recurring revenue and EBITDA that an investor is actually paying for. Adjustments typically flow in both directions: non-recurring items (one-off contracts, government grants, PPP loans) are stripped out; costs that are understated relative to a properly run business (below-market founder salaries, deferred maintenance, under-resourced functions) are added back.

The diligence team will build a normalised EBITDA bridge and then test each adjustment. If you have been reporting a £2m EBITDA and the QoE team concludes that £400k of it is non-recurring, your valuation anchor has just moved. The CFO should prepare this bridge internally before diligence begins and have supporting documentation for every line.

Working Capital Analysis

Working capital diligence has two objectives: establishing a normalised working capital target for the completion accounts mechanism, and identifying any manipulation of working capital in the months preceding the deal (accelerated collections, delayed supplier payments, deferred accruals). Investors will review monthly working capital movements over at least 24 months and will ask for explanations of any step-changes.

The completion accounts working capital peg is one of the most commercially significant outputs of diligence, yet it is consistently underprepared. CFOs should model their own normal working capital range before receiving the investor's calculation — the difference between your number and theirs directly affects the price paid at completion.

Revenue Cohort Analysis

For subscription or recurring revenue businesses, the diligence team will reconstruct revenue from cohort data to test net revenue retention, churn rates, and expansion patterns. They are looking for three specific issues: whether reported MRR or ARR is calculated consistently; whether churn is being understated through grace periods, paused accounts or other definitional choices; and whether expansion revenue from existing customers is masking deterioration in new customer economics.

Cost Structure Review

Investors will categorise every cost line as fixed, semi-fixed or variable, and will test whether the business model generates improving unit economics at scale or whether costs grow proportionally with revenue. Particular attention goes to headcount costs (are key people on market salaries?), technology costs (are AWS or infrastructure costs scalable?), and any costs that have been capitalised rather than expensed.

Legal Workstreams with Financial Implications

Legal diligence is not the CFO's primary domain, but several workstreams have direct financial implications that the finance chief must be across.

• IP ownership: Is all material intellectual property assigned to the company, or does any remain with individual founders, contractors or prior employers? Unassigned IP can create a warranty breach and, in extreme cases, trigger a deal failure. All contractor agreements should include IP assignment clauses, and any assignments not already documented should be remedied before diligence begins.
• Customer contracts: Do any material customer contracts contain change-of-control provisions that are triggered by the investment? Do any contracts contain most-favoured-nation pricing clauses that would require repricing across the customer base? Are there material contracts that are not in writing?
• Employment obligations: Are all employees on compliant contracts? Are there outstanding HMRC PAYE or NIC liabilities, including any relating to IR35 contractor status determinations? Are any share option grants properly documented and HM Revenue and Customs (HMRC)-approved where applicable?
• Related party transactions: Any transaction between the company and a connected party (director loans, leases with founder-owned entities, services provided by affiliated businesses) will be scrutinised. These need to be on arm's length terms and fully disclosed in the accounts.

Data Room: What Must Be There

A well-organised data room is itself a diligence signal. An investor who can navigate your data room efficiently forms a positive view of the management team's operational competence. A chaotic, incomplete or poorly labelled room signals the opposite.

The core financial materials a Series B data room must contain include the following categories:

Historical Financial Information

• Audited statutory accounts for the three most recent financial years, including directors' reports and auditor's reports
• Monthly management accounts for the 24 months preceding diligence, in consistent format
• Board packs for the 12–18 months preceding diligence, including all financial appendices
• Any prior year financial restatements and explanations
• VAT returns and corporation tax computations for the three most recent years
• R&D tax credit claims and supporting technical documentation

Forward-Looking Materials

• The current board-approved financial model, including all assumptions, with version history
• Current year budget and any re-forecasts, with variance commentary
• Three-year financial plan with detailed headcount assumptions
• Sensitivity analysis and scenario modelling

Corporate and Cap Table

• Full capitalisation table, including all option pools, warrants, convertible notes and SAFEs
• All shareholder agreements, investment agreements and side letters
• Articles of association and any amendments
• Board and shareholder resolutions for all material corporate actions
• EMI option scheme rules and individual option agreements

Common Issues That Kill or Reprice Deals

Based on transaction experience and adviser reports, a consistent set of issues recurs in Series B diligence that either kills deals or results in a material adjustment to terms.

The CFO's Role in Managing the Process

The CFO is the primary interface between the management team and the financial diligence advisers. This requires a specific set of behaviours throughout the process.

Before diligence begins, the CFO should conduct an internal read-across of the business against the expected diligence workstreams, identify any issues proactively, and decide which issues to disclose in the management presentation versus allow the diligence team to find. The general principle is to disclose proactively: an issue raised by management is a managed disclosure; an issue found by the investor's advisers is a due diligence finding with much worse commercial implications.

During diligence, the CFO should appoint a dedicated data room administrator and ensure that every request is logged, tracked and responded to within agreed timelines. Delays in responding to diligence queries are among the most common reasons deals extend beyond their original timeline and compound investor anxiety about management competence.

The CFO should also maintain a separate internal issues log throughout the process, tracking every finding raised by the diligence team, the management response, and whether the issue is likely to result in a price or terms adjustment. This allows the CEO and lead negotiator to enter the final terms negotiation with full visibility of where concessions are likely to be required.

50-Item Due Diligence Readiness Checklist

The following checklist covers the items a CFO should verify are ready before the data room opens. Items are grouped by workstream.

Financial Accounts (Items 1–10)

1. Audited statutory accounts for years 1, 2 and 3 are filed, signed and free of material qualification
2. Any going concern disclosures in prior accounts are supported by a written remediation narrative
3. Monthly management accounts for the last 24 months are in consistent format and reconcile to the statutory accounts
4. A reconciliation bridge exists between management accounts and statutory accounts for each financial year
5. Revenue recognition policy is documented in writing and applied consistently across all periods
6. Deferred revenue schedule is current and reconciles to the balance sheet
7. Accruals and provisions are appropriately supported with underlying calculations
8. All related party transactions are disclosed in the statutory accounts and supported by board minutes
9. Director loan accounts are at nil or have been repaid; any outstanding balances are on documented arm's-length terms
10. Fixed asset register is current and reconciles to the balance sheet

Tax and HMRC (Items 11–18)

11. Corporation tax computations for all open years are filed and any outstanding liabilities are accrued
12. R&D tax credit claims are supported by technical documentation reviewed by an R&D tax specialist
13. VAT returns are filed and reconcile to the management accounts revenue figures
14. PAYE and NIC are current; no outstanding HMRC charges or payment plans
15. IR35 status determinations have been made for all material contractor relationships
16. EMI option schemes are HMRC-approved and all individual grants are within approved limits
17. Any HMRC correspondence (compliance checks, enquiries) is documented and has been responded to
18. Transfer pricing documentation exists if there are intercompany transactions with overseas entities

Revenue and Commercial (Items 19–27)

19. ARR or MRR is calculated using a documented, consistent methodology
20. A customer-level revenue schedule exists showing logo retention, revenue retention and expansion by cohort
21. Churn definition is documented and applied consistently; paused or grace-period accounts are excluded from ARR
22. Top 20 customer contracts are in the data room, signed and dated
23. Any material customer concentration (single customer >15% of revenue) is disclosed and explained
24. Change-of-control clauses in material contracts have been reviewed and flagged if relevant
25. Any verbal or undocumented commercial arrangements with customers or suppliers are converted to written agreements
26. Pipeline and forward-order book data is available with methodology documentation
27. Average contract value, contract length and renewal rate data is available by cohort

Cap Table and Corporate (Items 28–36)

28. Cap table is current, reconciled to the share register and includes all dilutive instruments
29. All prior investment rounds are supported by completed subscription agreements and board resolutions
30. All option grants are documented, within the approved pool and consistent with scheme rules
31. Any convertible notes or SAFEs have documented conversion mechanics and cap/discount terms
32. Shareholder agreement and articles of association are current and consistent with each other
33. Any side letters with existing investors are disclosed and included in the data room
34. Anti-dilution provisions, pro-rata rights and information rights are clearly documented
35. Company secretarial filings at Companies House are current and accurate
36. All director appointments, resignations and filings are up to date

Intellectual Property and People (Items 37–44)

37. All IP developed by employees is assigned to the company by virtue of employment contracts
38. All IP developed by contractors is assigned to the company by virtue of contractor agreements
39. Any IP developed by founders prior to incorporation has been formally assigned to the company
40. Key trademarks are registered in relevant jurisdictions
41. All employees are on written, signed employment contracts with appropriate confidentiality and IP clauses
42. Any outstanding employee disputes, grievances or tribunal claims are documented and assessed for liability
43. Senior leadership compensation is documented and is within a reasonable market range
44. Any leaver provisions in option schemes have been applied correctly for departed employees

Operational and Forecasting (Items 45–50)

45. The current board-approved financial model is available in its working Excel format, with assumptions documented
46. Sensitivity analysis has been run on the three or four key assumptions (churn, conversion, CAC, ARPU)
47. A current-year budget exists and monthly actuals are being tracked against it with variance commentary
48. Headcount plan is documented by role, department and hire date, reconciling to the financial model
49. Key person dependencies have been identified and retention arrangements are in place or planned
50. Insurance coverage (D&O, professional indemnity, cyber, employers' liability) is current and appropriate for the stage

Key Takeaways

• Series B diligence is a professional, forensic exercise led by specialist advisers. Prepare accordingly, not as an extension of Series A conversations.
• The quality of earnings exercise will normalise your reported EBITDA. Build your own normalised bridge internally before diligence begins so there are no surprises.
• Revenue recognition consistency across periods is the most common source of QoE adjustments. Document your methodology and apply it uniformly.
• Working capital diligence sets the completion accounts peg. Model your own normal working capital range before the investor presents theirs.
• Proactive disclosure of known issues before the data room opens is almost always better than allowing advisers to find them independently.
• A well-organised data room is itself a signal of management quality. Label documents clearly, maintain version control and respond to requests promptly.
• Use the 50-item readiness checklist above to identify and remediate gaps at least four weeks before the expected data room opening date.