Financial due diligence is thorough on earnings, working capital and net debt. Treasury and banking get less attention, often a short section built from the target's own summary.
That leaves gaps. Some of them move price, some move structure, and some move the closing date.
Why does standard diligence miss treasury risk?
Most treasury risk does not sit in the accounts. It sits in facility agreements, guarantees, pooling contracts, bank mandates and the way banks process a change of ownership.
The accounts show cash and debt at a date. They do not show which cash can move, which contracts end at closing or how long banks will take to accept the new owner.
Reading those documents takes someone who knows how banks write and apply them. Without that, the risks surface in the weeks before closing, when they are hardest to fix.
Which red flags sit in the contracts?
Change of control clauses
Credit facilities, guarantees, hedging agreements and pooling contracts often include change of control clauses. They can require lender consent, early repayment or termination at closing.
Each one needs a plan: consent, refinancing or replacement. Discovering one in the final week turns a formality into a negotiation under time pressure.
Guarantees and pooling liabilities
A target that sits in the seller's cash pool may owe the pool money, or be owed money by it, on the closing date. It may also have guaranteed other members of a notional pool.
Those positions need to be settled, released or priced. Left alone, they become liabilities that move with the target.
Hedging agreements
Open hedges may have to be closed or novated at completion. Their mark to market value on that day can be material in either direction.
Ask for the hedge schedule early, with counterparties and maturities. It also shows how the target manages FX risk in practice.
Which red flags sit in the cash?
Trapped cash
Cash in countries with FX controls, dividend restrictions or repatriation taxes may not be available to service acquisition debt. It looks the same on the balance sheet as cash anywhere else.
The question is not whether the cash exists. It is how much of it can reach the borrower, when, and at what cost.
Local tax and legal advisers should confirm the rules for each country. The rules change, and the answer depends on the entity structure as much as on the country.
Cash that is not really free
Operating minimums, collateral for guarantees, customer deposits and cash held for regulatory reasons all reduce the free figure. Each one should be identified and quantified separately.
Worked example: from reported cash to free cash
The table uses illustrative numbers for a hypothetical target. All amounts are invented to show the bridge. They are not client data or a typical result.
| Item | Illustrative amount | What it represents |
|---|---|---|
| Reported cash | USD 50 million | Cash at the reference date in the accounts |
| Trapped cash | Less USD 8 million | Cash in countries with repatriation limits |
| Operating minimum | Less USD 10 million | Cash the business needs day to day |
| Restricted cash | Less USD 4 million | Collateral and cash held for third parties |
| Free cash | USD 28 million | Cash available to the new owner |
| Pooling liability | USD 3 million owed to seller | A debt-like item to settle or price |
In this illustration, free cash is just over half of reported cash. The price, the debt package and the cash definitions in the purchase agreement should reflect the lower figure.
Which red flags sit in FX?
FX exposure is often described in general terms in a data room. The real questions are which currencies, which flows, which hedges and at what cost.
A target with unhedged exposure can turn a stable forecast into a volatile one. A target with expensive hedging or wide FX margins carries a cost the model may not show.
Measuring FX margins against mid-market during diligence is quick when trade data is available. The same analysis then feeds the 100 day banking review.
What the bank sees
From the bank side, an acquisition triggers a credit review and a compliance review at the same time. Credit teams look at the new owner, the new debt level and the change of control terms.
Compliance teams run know your customer checks on the new ownership, including the fund and its beneficial owners. They work to their own queue, not to the deal timetable.
Banks also know the target's banking better than the buyer does. They know its facilities, its pooling, its FX volumes and how its pricing compares with similar clients.
A buyer who asks the right questions early can use that knowledge. A buyer who waits for closing meets it as a set of conditions and delays.
What does the red flag checklist look like?
Every review should run through the same list, then go deeper where the target's profile demands it.
- Change of control clauses in facilities, guarantees, hedges and pooling contracts.
- Positions in the seller's cash pool, and guarantees given to other pool members.
- Cash by country, with any FX controls, dividend limits or repatriation taxes.
- Operating minimums, collateral and restricted cash.
- FX exposure by currency, the hedges in place and the cost of hedging.
- Bank accounts, mandates and signatories that must change at closing.
- Bank KYC requirements and realistic lead times for the new ownership.
- Banking cost and FX pricing compared with what the target could achieve.
Which questions should go to management?
Documents answer most questions, but not all. A short management session fills the gaps quickly.
- Which banks would you keep, and which would you drop, if you could start again?
- Where does cash get stuck, and how long does it take to move it?
- Which facilities or hedges have conditions linked to ownership?
- Who can release payments today, and who approves changes to bank details?
- What do you pay for FX, and how do you know?
- Which services does the seller provide that you would need to replace?
The answers often reveal more than the data room. They also show how well the finance team understands its own banking.
How do findings change the deal?
Some findings change the price, through debt-like items or a lower free cash figure. Others change the structure, such as refinancing a facility that cannot survive the change of control.
Some change the timetable, because consents and KYC take time. Your lawyers decide how each finding is reflected in the purchase agreement, and the treasury review gives them the facts.
The rest becomes the post-closing plan. Day one actions go into the day one banking checklist, and savings go into the value creation plan.
When should the treasury review start?
Ideally before exclusivity ends, while there is still time to adjust price and structure. A desktop review of the information memorandum can start even earlier.
Independent treasury due diligence runs the checklist, sizes the findings and turns them into a day one plan. It complements financial and legal diligence rather than replacing them.
This insight reflects general analysis and observations from FIRMA Advisory's work in treasury, banking, and cross-border financial advisory. It does not constitute investment advice, financial advice, or a recommendation in respect of any specific security, transaction, or financial decision. For analysis specific to your organization, contact us at [email protected].