Financial Due Diligence in an Uncertain World: Why Historical Numbers Don't Tell the Full Story

Colin Prasad

27 June 2025

Global markets are experiencing significant volatility. Oil prices have risen sharply amid tensions in the Middle East. Freight costs may increase if disruptions to the Suez Canal persist. US trade policies continue to evolve, while currency fluctuations reflect ongoing economic uncertainty.

For Australian businesses considering acquisitions, these developments highlight a critical challenge: historical financial statements may not reflect the current operating environment.

The Limitations of Backward-Looking Analysis
A target company’s financial statements may show consistent profitability and stable margins in recent periods (albeit we also had COVID, then Ukraine). However, these historical results may not capture emerging risks that could materially impact future performance.

Consider, for example, a business that imports components from overseas. Its past financial results may look solid, but potential tariff changes or trade regulations could significantly increase input costs. Similarly, a company with international sales may now face currency headwinds that weren’t present during the historical period under review.

These factors represent real business risks, yet they typically don’t appear in historical financial data.

Moving Beyond Traditional Financial Review
Standard financial analysis focuses on analysing historical performance and position. While this work remains important, it provides limited insight into future performance drivers.

Comprehensive financial due diligence examines forward-looking risks and opportunities, including:

Supply chain analysis: Evaluating supplier concentration, geographic sourcing risks, and economic vulnerabilities.
Currency exposure assessment: Reviewing both transactional and translational risks, as well as broader competitive impacts.
Commodity price sensitivity: Analysing how fluctuations in input costs may affect gross margins and pricing strategies.
Operational cost pressures: Considering anticipated increases in freight, energy, and labour expenses.

The Value of Normalised Analysis
Experienced due diligence teams reconstruct historical performance to reflect current market conditions. This normalised analysis helps buyers understand what earnings might have looked like under today's operating environment.

Forward-looking analysis may model low, medium and high scenarios, stress-testing key assumptions and identifying potential margin pressures or opportunities. This approach provides buyers with a more realistic view of expected returns and risk factors.

Practical Implications for Buyers
Successful acquirers focus on business resilience of maintainable earnings alongside historical performance. They want to understand how a target company might perform under different economic scenarios and what management levers are available to respond to changing conditions.

Key questions include:

How dependent is the business on specific suppliers or markets?
What flexibility exists to adjust pricing or operations?
How quickly can the business adapt to external changes?

Looking Forward
Today's economic environment requires a sophisticated approach to financial due diligence. Buyers need advisors who can combine traditional financial analysis with strategic assessment of emerging risks and opportunities.

The most successful acquisitions will be those where buyers fully understand both the historical performance and the future operating context. In an uncertain world, this comprehensive view becomes essential for making informed investment decisions.

Understanding these dynamics upfront allows buyers to structure deals appropriately, plan for potential challenges, and position their investments for long-term success.

This analysis draws on our experience in financial due diligence across various sectors and transaction types in the Australian mid-market.

Corporate Finance Due Diligence