Answers / Financial Due Diligence
What is the 'quality of net assets' and why is it important in FDD? Give an example of an issue you might uncover.
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Quality of net assets assesses whether the reported assets and liabilities are fairly stated, collectible, and not overstated. It's important because inflated assets or understated liabilities can lead to overpaying or unexpected cash outflows post-closing. An example: a large receivable from a customer nearing bankruptcy—the buyer might need to reserve against it, effectively reducing net assets. This could trigger a purchase price adjustment or renegotiation.
WHAT INTERVIEWERS LISTEN FOR
- ✓Quality of net assets: fair valuation, collectibility, no overstatement
- ✓Importance: avoids overpayment and post-closing surprises
- ✓Example: doubtful receivable from distressed customer
COMMON MISTAKES
- ✗Thinking it's only about fixed assets
- ✗Ignoring liabilities (e.g., understated provisions)
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