Due Diligence Checklist for Buying a Mid-Market Company: What Most Buyers Miss

Somewhere between €10 million and €150 million in enterprise value, mid-market acquisitions occupy a specific risk band that buyers consistently underestimate. In Western European and UK markets, this range sits at the lower end of what most institutional buyers would call mid-market — in CEE, it covers the majority of serious transaction activity. These are companies, typically with revenue between €1 million and €50 million, too small to have the corporate processes that make larger deals more legible: audited financials on IFRS, documented SOPs, or a management team that has operated independently of the founder for years. 

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Think a €10M Croatian logistics roll-up, a €25M Hungarian manufacturing business with one dominant customer, or an €50M Romanian renewable developer where the founder holds every regulatory relationship personally. 

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The due diligence challenge in each case is not whether the reported numbers are accurate. It is whether those numbers will still exist twelve months after you close.

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Before you rely on the numbers in a mid-market deal, make sure you understand what will actually survive after closing. Talk to us to assess deal-level risk before you sign.

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According to the Harvard Business Review, roughly 70–90% of mergers fail to achieve their strategic objectives, and the failures rarely trace back to a bad business. They trace back to risks that were not identified during negotiations. The owner was the business. Three key employees resigned within the first quarter. Equipment that drove 40% of production capacity needed replacing. The working capital the seller handed over was not the working capital needed to actually run the company at normal operating conditions.

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Standard quality of earnings work confirms that reported EBITDA is reconcilable to underlying accounting records and adjusted for non-recurring items.. It does not tell you whether that EBITDA will exist next year under new ownership. These are different questions, and they require different investigation.

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This checklist covers both. Part one sets out the baseline: what every serious buyer reviews. Part two goes deeper, the gaps that standard diligence scope is structurally designed to miss, with the specific diagnostic techniques that surface them. Part three addresses the additional layer that applies to mid-market transactions in Hungary and Romania specifically, where standard international templates leave buyers exposed as documentation practices, founder-centric management structures, and regulatory licensing frameworks can differ materially from Western European norms.

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Standard Due Diligence Checklist

These are the minimum categories that any competent buyer covers. A thorough Quality of Earnings (QoE), a legal review of contracts, and a basic operational assessment tell you what the business looked like before you owned it. They rarely tell you what it will do after.

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Legal Due Diligence

• Corporate structure — full ownership chain, share classes, shareholder agreements, drag-along/tag-along provisions
• Material contracts — customers, suppliers, distributors, and lessors, with particular attention to term, exclusivity, and renewal provisions
• Change-of-control clauses — a specific pass through every contract to identify provisions that allow termination or renegotiation upon a change of ownership
• Intellectual property — patents, trademarks, domain names, ownership chain (especially IP developed by contractors rather than employees)
• Litigation — current and historical disputes, regulatory actions, and any threatened claims
• Employment agreements — senior team, non-competes, severance obligations, and trade union arrangements
• Permits, licences, and regulatory compliance — and whether they transfer

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Financial & Tax Due Diligence

• 3–5 years of audited or reviewed financial statements — P&L, balance sheet, cash flow statement
• Quality of earnings (QoE) — normalized EBITDA adjusted for non-recurring items, owner compensation, related-party transactions, and accounting policy differences
• Revenue breakdown by customer, product line, geography, and contract type (recurring vs project vs one-off)
• Working capital analysis — accounts receivable and payable aging, inventory levels, seasonal patterns, and the trailing 18-month trend in AR/AP days
• Debt schedule — all outstanding facilities, off-balance sheet obligations, operating leases, personal guarantees, and uncommitted credit lines
• Capital expenditure history — actual spend vs depreciation for each of the past five years
• Tax compliance — filings, open assessments, deferred tax positions, and any jurisdiction-specific exposure

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Commercial Due Diligence [increasingly requested by the customer, but not typical]

• Market size, growth trajectory, and the company's defensible position within it
• Customer concentration — revenue by customer with contract terms, renewal history, and actual churn data
• Competitive landscape — not just who the competitors are, but whether the target's market position is gaining or losing ground
• Voice of customer — direct calls or surveys with actual buyers of the target's product or service
• Pricing model sustainability — are current margins achievable under competitive pressure, or has pricing been held by non-transferable owner relationships?

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Regulatory and Compliance

• Industry-specific licensing and whether it transfers on a change of ownership
• Environmental liabilities — past use, contamination risk, waste management obligations
• Merger control thresholds in relevant jurisdictions — when notification is required and what the timeline means for deal structure
• FDI screening — sectors and ownership thresholds that trigger regulatory review, which varies meaningfully across CEE markets
• IT infrastructure — age, scalability, security posture, GDPR compliance status
• Process documentation — what is written down vs what lives in people's heads
• Physical assets — especially in manufacturing and energy, an independent technical assessment of equipment condition and near-term capital requirements

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Digital Due Diligence

Digital infrastructure is increasingly material to valuation and post-acquisition performance, particularly in technology, distribution, and consumer-facing businesses. Standard diligence rarely examines it with sufficient depth.

• Website and digital asset ownership — domain registration, hosting agreements, CMS access, and whether these are owned by the company or personally controlled by the founder
• Traffic and demand validation — independently verified web analytics, SEO footprint, and paid vs organic traffic split; seller-reported user or customer numbers should be cross-checked against traffic data
• Technology stack and technical debt — age and scalability of core systems, reliance on unsupported legacy infrastructure, and estimated remediation cost
• Data assets — customer databases, their integrity, GDPR compliance status, and whether they are genuinely transferable
• Digital revenue quality — for businesses with online sales or subscription components, cohort retention, churn rate, and the proportion of revenue attributable to the founder's personal digital presence
• Cybersecurity posture — vulnerability history, incident log, data storage practices, and third-party access controls
• Brand and reputation — systematic review of ratings, reviews, and social presence; reputational liabilities that do not appear on the balance sheet

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The materiality of digital DD varies significantly by sector and business model. For asset-heavy manufacturing or agricultural businesses, the scope may be limited. For any business where customer acquisition, retention, or brand perception has a meaningful digital component, it warrants dedicated scope and independent verification.

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What Most Buyers Miss in DD (Due Diligence) and Why

The gaps below appear in purchase price adjustment arbitrations or post-acquisition disputes with enough regularity to constitute patterns. They are missed not necessarily because buyers are unsophisticated, but often because standard diligence scopes are primarily designed to verify reported figures rather than to challenge the operating model. Here is what that looks like in practice.

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If your due diligence stops at verifying EBITDA, you’re not seeing the real deal risk. Get in touch to pressure-test your DD scope before you commit.

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1. EBITDA is a Starting Point, Not an Answer

EBITDA is easily overstated in mid-market companies. Maintenance spending may be systematically understated, R&D or development expenses capitalized, and critical hires postponed. Because depreciation and amortization are already excluded from EBITDA, deferred investment does not surface through the P&L, it surfaces through maintenance spend that is too low to sustain the asset base. These practices can temporarily inflate reported profitability but rarely appear as QoE adjustments unless specifically examined during diligence. As a result, reported EBITDA may be formally correct yet economically misleading, reflecting a business optimized for sale rather than one operating at a sustainable level.

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What to do instead:

Build a free cash flow model. Start from adjusted EBITDA, then subtract maintenance capex at the level required to sustain current revenue, not what was actually spent. If depreciation has exceeded capex for three or more consecutive years, ask directly: what has not been replaced, and what will it cost? In manufacturing and energy assets, this frequently requires an independent technical survey.

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A company reporting €4M EBITDA while spending €600K per year on capex against €1.2M in annual depreciation is not generating €4M in free cash flow. It is consuming its asset base. The adjusted free cash flow figure is closer to €3.4M — and declining.

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2. The NWC Peg and the NWC Analysis Are Not the Same Thing

This is one of the most technically misunderstood areas in mid-market M&A, and it directly drives purchase price disputes.

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Net working capital analysis for free cash flow purposes answers the question: what does this business actually need to fund its operations? This is a financial calculation.

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The NWC peg is something different. It is the level of working capital that both parties agree will be delivered at closing, negotiated as part of the deal structure. The peg is set to ensure the buyer receives a business with sufficient liquidity to operate without requiring an immediate cash infusion. These two figures are related but not identical, and conflating them costs buyers money.

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The specific problem: sellers often anchor the peg to a trailing twelve-month average that includes the pre-sale period during which working capital was actively managed upward. Payables were stretched. Receivables were collected aggressively. Inventory was drawn down. If the peg is set against that inflated baseline, the buyer agrees to receive a working capital position that cannot be sustained under normal operating conditions, and funds the gap out of post-closing cash flow.

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What to do instead:

Analyze working capital month-by-month over 24–36 months, not just the trailing average. Calculate the coefficient of variation to understand normal seasonal ranges. If AR days shortened or AP days lengthened materially in the 12–18 months before the sale process began, this is a red flag that requires direct explanation. Set the NWC peg based on a normalized operating baseline, not the pre-sale peak.

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3. Revenue Quality: Predictable vs Reported

Headline revenue is a factual figure. Revenue quality, the degree to which next year's revenue is predictable based on existing contracts and demonstrated customer behaviour, is an analytical judgment that requires going beyond reported numbers.

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Mid-market sellers, typically without deliberate intent, present their businesses in the most favorable light. A year in which a single large project happened to close inflates reported revenue and EBITDA. An aggressive Q4 discount cycle pulls forward demand that would otherwise occur in the following period. A contract that is technically multi-year but has a 30-day termination clause is not the same as locked revenue, but it is often presented as though it were.

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The diagnostic questions:

• What percentage of next year's budgeted revenue is already contracted, with what termination provisions?
• What is the actual gross revenue retention rate, money retained from existing customers year-over-year, not just net retention?
• In the last three years, how many customers in the top ten have been replaced by new entrants? Churn at the top of the customer list is more dangerous than headline churn metrics suggest.
• For any large customer representing more than 15% of revenue: when was the last contract renewal, who from the target company owns that relationship, and what happens to that relationship if the founder leaves?

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If the seller's revenue narrative does not reconcile with the AR aging schedule, that is a diagnostic flag worth pursuing. Aging that skews heavily toward newer customers, or toward customers with payment terms that do not match the stated contract terms, usually means something.

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4. Customer Concentration Hidden in the Receivables Ledger

Customer concentration is usually disclosed in the data room. The top ten customer list typically appears in the information memorandum and is supported by revenue breakdowns. What is less frequently examined is how those relationships actually behave in the receivables ledger.

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In many mid-market companies, a small number of customers account for a disproportionate share of revenue while also operating under extended or inconsistent payment terms. This is particularly common when the company's largest customers are large distributors or retail chains with significant bargaining power.

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The risk is not only concentration itself, which buyers can price. The risk is economic dependence that is visible in the aging schedule but not acknowledged in the revenue narrative.

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Typical signals include:

• A single customer representing 20–30% of receivables while representing a smaller percentage of recognized revenue.
• Payment cycles that consistently exceed contractual terms by 30–60 days.
• Large balances that are periodically cleared just before year-end reporting.

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These patterns indicate that the customer relationship is functioning partly as a financing arrangement. The supplier effectively extends credit to maintain the commercial relationship.

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The practical diligence test is simple: reconcile the top customers in revenue with the top balances in the receivables aging report and examine how payment behavior has evolved over time. If the largest customer is also the slowest payer, the buyer is implicitly financing the relationship post-close.

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5. Owner Dependency: How to Actually Test for It

Owner dependency is the most commonly cited risk in mid-market acquisitions and the least rigorously tested. 

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The question is not whether the owner is involved in the business. They almost certainly are. The question is whether the value of the business is separable from the person of the owner, whether revenue, relationships, and institutional knowledge will transfer with the company or walk out the door.

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Specific tests:

• Management interview consistency: Ask every member of the management team the same strategic questions independently. If answers diverge significantly, or if multiple team members defer to the owner rather than answering directly, the management layer is not functioning as independently as the org chart suggests.
• Operational observation: Spend time on site. Which decisions get escalated? Who do staff call when the owner is unavailable? A business where the owner's phone is the real operations center is a fundamentally different acquisition risk than one where the owner primarily attends board meetings.

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The private equity test: if the founder disappeared tomorrow, what percentage of revenue would be at risk within twelve months? If honest analysis suggests more than 25%, the deal structure — price, retention mechanisms, earnout design, transition period — should reflect that risk explicitly, not assume it away.

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6. Management Capability: The Org Chart vs the Operating Reality

Many mid-market companies present an organizational chart that shows a complete management layer. What the chart does not show is whether those managers have ever made independent strategic decisions, or whether they function as senior implementers of the founder's judgment.

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The distinction matters because the buyer is not just acquiring a company; they are acquiring a management team that will need to operate without the founder, often within a new governance and reporting structure that is more demanding than the one they are used to. The capability gap is not visible in financials. It becomes visible in the first six months post-close when a management team that was competent at executing the founder's decisions is suddenly expected to originate them.

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What to look for:

• P&L accountability: Have any of the senior managers ever owned a P&L independently? Can they explain their own cost drivers, margins, and capital requirements without referencing the owner?
• Succession history: Has the company ever operated without the founder for an extended period, a sabbatical, an illness, a stretch when the founder was focused on another project? What happened?
• Compensation structure: Is the management team compensated for performance, or primarily for loyalty and tenure? A management team whose compensation does not reflect business outcomes is a team whose incentives will not align with those of a new owner.

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7. Seller Projections: The Stress Test

In most cases, the seller provides financial projections. They are closer to marketing documents than operational forecasts. The buyer's job is not to accept or reject them, it is to interrogate the assumptions and identify which ones are unsupported.

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The standard approach is to compare projected growth rates to historical performance. This is necessary but insufficient. The more informative test is to compare projections to independent industry data and to ask what the implied assumption is about market share.

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If a company has grown revenue at 6–8% annually for the past five years, and the projection shows 15% growth, the implicit assumption is that the company is taking market share. From whom? Why now? What has changed in the competitive environment that makes this acceleration plausible? A projection that cannot answer these questions in terms consistent with the historical pattern of the business warrants a valuation adjustment.

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Specific checks:

• Receivable days assumption: If the projection assumes 45-day collection but the historical average is 68 days, the implied cash flow is overstated. This is rarely flagged but directly affects the free cash flow used to justify the purchase price.
• Cost structure assumption: If the projection shows margin expansion, identify the specific cost items that are expected to decrease as a percentage of revenue. Is this achievable, or is the margin improvement assumed rather than earned?
• Capex assumption: If the projection shows continued strong EBITDA but capex at current (depressed) levels, the projection is implicitly assuming the deferred maintenance situation continues. Price accordingly.

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8. Related-Party Transactions and Off-Balance Sheet Arrangements

In CEE mid-market companies, related-party arrangements are common and structurally embedded. They are not always disclosed clearly, and even when disclosed, they are not always correctly normalized in QoE work.

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The most frequent form: the operating company rents its facilities from a separate entity owned by the founder, often at below-market rates as a deliberate tax efficiency structure, or at above-market rates as a form of owner compensation. The lease expense appears in the P&L, but without a market rent analysis, the reported EBITDA cannot be accurately normalized.

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A related but distinct issue: management fees, consulting fees, or service charges paid to entities owned by the founder or family members. These are common in family businesses as a mechanism to distribute cash tax-efficiently. When they are added back as non-recurring items in QoE work, the implicit assumption is that they will not recur. That assumption is correct for the founder's personal entities, but the costs they were covering (management time, professional services, administrative support) often do recur, under different line items, after the transaction.

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What to request:

A full related-party transaction schedule for the three years prior to the transaction, covering all payments to entities owned or controlled by the founder, family members, or management. Then build a normalized cost structure that replaces related-party costs with market-rate equivalents, not zero.

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9. The Auditor's Passed Journal Entries

Every external audit produces a set of proposed adjustments that the auditor identified but did not require the company to record, because they fell below the audit's materiality threshold. These are called passed journal entries. They are almost never reviewed in standard buy-side diligence.

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This is extremely important, because the materiality threshold for an audit is calculated as a percentage of revenue or total assets, a relatively high bar. The relevant materiality threshold for M&A due diligence is a percentage of EBITDA, which is a much lower number. Items that did not meet the audit's threshold can be large enough to be material adjustments to the deal price.

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Passed journal entries also reveal how management responds to audit challenges. A pattern of consistently declining to record auditor-proposed adjustments is a signal about the reliability of reported figures, and the culture of financial reporting in the business.

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What to ask for:

Request the prior three years of auditor management letters and any correspondence related to proposed but unrecorded adjustments. This is a standard request in institutional buy-side processes. Resistance to providing it is itself informative.

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10. Operational Taxes: The Liabilities That Follow the Assets

Corporate income tax attracts significant diligence attention. Operational taxes, VAT, payroll taxes, local property levies, excise duties, and jurisdiction-specific compliance obligations, receive less scrutiny, and they carry a critical distinction from income tax: they follow the assets, not the legal entity. Deal structure provides no shelter from inherited operational tax liabilities.

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In a transaction structured as an asset purchase for income tax efficiency, the buyer inherits the full VAT and payroll compliance history of the acquired assets. In a share purchase, the buyer inherits the full tax history of the acquired company, including any outstanding assessments that have not yet been raised.

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The specific risks that recur most frequently in mid-market deals: multi-jurisdiction payroll tax compliance where employees have been treated as self-employed contractors (a classification that tax authorities challenge retroactively); VAT nexus exposure where the company has been invoicing in jurisdictions where it has not been registered; and excise or customs duty exposure in distribution or manufacturing businesses where the compliance history is maintained informally.

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A tax audit initiated two years post-close for a three-year exposure period can wipe out a material portion of the purchase price. Representations and warranties in the SPA do not prevent the tax liability from arising — they provide a right of recovery, which is only as valuable as the seller's continued solvency.

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Due Diligence in Hungary and Romania

For buyers executing transactions in Hungary, Romania, or across the corridor between the two markets, please be prepared for an unorthodox DD process. The specific risk profile of mid-market acquisitions in these markets requires additional investigation in areas that simply do not appear in templates designed for Western European or US deals.

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These are not edge cases. They are predictable features of transactions in this region.

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Accounting Basis Differences

Hungarian GAAP and Romanian GAAP both diverge from IFRS in ways that affect reported earnings. The divergences are not cosmetic.

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In Hungary: fixed asset revaluation is treated differently from IFRS, creating situations where the book value of assets diverges significantly from economic value. Provision methodology for doubtful receivables follows local rules that may result in understated bad debt provisions relative to what IFRS would require. On development costs, the direction of divergence is frequently misunderstood: under IFRS, development costs must be capitalized once the criteria in IAS 38 are met. Under the Hungarian Accounting Act, capitalization of R&D costs is permitted but not required. This means a Hungarian GAAP target may have expensed development costs that IFRS would require on the balance sheet — the effect on reported EBITDA and net assets depends on management’s policy election, and it needs to be traced explicitly.

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In Romania: deferred tax treatment, the handling of government grants and EU subsidies (particularly relevant in agriculture and manufacturing), and the accounting for long-term contracts all have specific local rules that affect how earnings are reported. A business that has received significant EU structural fund support may be reporting grant income that is non-recurring and should be excluded from a normalized earnings base — but may not have been excluded in seller-prepared materials.

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What to do:

Any financial model used to justify purchase price should restate historical financials onto a consistent IFRS or local GAAP basis. Do not rely on the seller's adjusted EBITDA without performing this restatement independently.

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Land Registry and Property Title Reliability

In manufacturing and agricultural acquisitions in both Hungary and Romania, title chain verification is not optional. The post-communist privatization and restitution processes of the 1990s and early 2000s created a layer of potential claims on real property that remain active in both markets, and that do not always appear in current land registry records.

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In Romania specifically: restitution claims under Law 10/2001 and subsequent legislation remain unresolved for a significant share of commercial and agricultural land. A company that has occupied and operated a property for twenty years may have a clean operating history while the underlying title is subject to a restitution application that is pending but not yet decided. The buyer acquires the operating company and the title dispute.

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In Hungary: zoning compliance for industrial property requires verification beyond the land registry entry. A property registered as industrial use may have outstanding building compliance issues or environmental use restrictions that affect the buyer's ability to operate or develop the asset.

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The minimum standard:

An independent property title opinion for all owned real estate from a law firm with specific expertise in the relevant market. This is not a general legal opinion — it requires a specialist.

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VAT and Deal Structure: Share vs Asset Purchase

The choice between a share deal and an asset deal structure in Hungary and Romania has direct VAT and transfer tax consequences that buyers often underestimate.

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In Hungary: a share deal is generally VAT-neutral, but the stamp duty implications of holding structures and the real estate transfer tax exposure (which applies to transactions involving real property–rich companies) require specific modelling. A transaction structured as a share deal primarily to achieve income tax efficiency may inadvertently trigger real estate transfer tax at rates that materially affect deal economics.

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In Romania: the VAT treatment of business transfers requires careful analysis. Transactions that qualify as a transfer of a going concern (TOGC) are not treated as a supply for VAT purposes and therefore fall outside the scope of VAT. Determining whether a transaction qualifies as a TOGC is a technical assessment that requires Romanian tax counsel rather than a general assumption.

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FDI Screening and Merger Control

Both Hungary and Romania operate foreign direct investment screening regimes for transactions in strategic sectors. Both also require merger control notification at deal-specific turnover thresholds that differ from EU merger regulation thresholds.

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Hungary: The GVH (Competition Authority) applies notification thresholds of HUF 20 billion (€50 million) combined turnover and HUF 1.5 billion (€4 million) for each of at least two parties. Hungary operates two parallel FDI screening regimes. The second regime, enacted under Act L of 2025, expanded coverage alongside the existing regime. Together they cover sectors including energy, telecommunications, financial services, transport, and certain manufacturing. Approval processes add timeline risk and, in some cases, substantive conditionality.

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Romania: The Competition Council applies notification thresholds of €10 million combined worldwide turnover and €4 million Romanian turnover for each of at least two parties. Romania’s FDI screening law covers energy, water, transport, and defense sectors, among others, having a threshold of €2 million. Notification does not guarantee approval, and the timeline for FDI review can extend a deal closure by months.

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Gun-jumping — completing a notifiable transaction before clearance is received — carries substantial financial penalties in both jurisdictions. The carve-out provisions that allow limited operational continuity during the review period must be specifically negotiated and documented.

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Employment Law: What Transfers and What Does Not

Both Hungary and Romania have legislation equivalent to the EU's Transfer of Undertakings (TUPE) Directive, which provides for the automatic transfer of employment contracts on a change of employer in certain transaction structures. The specific application differs between markets and between share deal and asset deal structures.

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In a share deal in either market, employment contracts transfer automatically — the entity employing the staff continues to exist. The buyer inherits all existing terms, accrued entitlements, and any outstanding employment-related claims.

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In an asset deal: whether TUPE applies depends on the nature of the transfer and the substance of what is being acquired. In both Hungary and Romania, transferring the business as a going concern (including its workforce) will typically trigger automatic transfer obligations. Attempting to cherry-pick assets while excluding liabilities is possible in some structures but requires specific legal architecture and carries risk if challenged.

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The practical issue in many mid-market transactions: undisclosed employment-related claims. In family businesses where HR processes are informal, claims related to unpaid overtime, improper terminations, or undeclared benefits can accumulate without appearing on the balance sheet. These surface after closing.

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Permanent Establishment Risk for Foreign Buyers

Foreign buyers who take an active role in managing a newly acquired company — through seconded employees, participation in management board decisions, or regular presence in the country — can inadvertently create a taxable permanent establishment in Hungary or Romania, even before the transaction formally closes.

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This is particularly relevant for PE buyers who intend to install interim management or take board-level control immediately post-close, and for strategic acquirers whose group treasury or HR functions begin operating across the acquired entity during a transition period.

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Due Diligence Red Flags

Not every finding in a due diligence process carries the same weight. Some are negotiating points. Some require structural responses. A few should make you question whether to proceed at all. The table below maps a few consequential flags to their correct response — not a generic "investigate further" but a specific action. Five of them are expanded below the table because the implication line understates the mechanism, and understanding the mechanism is what determines whether your response actually mitigates the risk or just prices it in.

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The capex-to-depreciation gap is the most underpriced risk in the table. A single year below parity is unremarkable — capital spending is lumpy. Three consecutive years is a pattern, and it tells you something specific: the business has been run to maximize reported earnings, not to maintain productive capacity. The question to ask in every management interview is not "what capex is planned?" It is "what has been deferred, and why?" Sellers often have a ready answer — "we were waiting to see how the market developed," "the equipment still has useful life" — but the follow-up is harder: at what point does deferral become replacement, and what does that cost? In manufacturing and energy assets, get an independent technical assessment. The number that comes back is frequently larger than the seller's estimate by a meaningful margin, and it belongs in your valuation model before you agree a price, not in a post-closing capital budget you discover later.

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A recent Ferdinand engagement illustrates this dynamic well. In an agribusiness buy-side mandate, our review showed that capital expenditures in the preceding years had been significantly below depreciation. Once this became clear during due diligence, the investment case had to be reassessed. The resulting adjustment to the required replacement capex materially affected the valuation and delayed the transaction by more than six months while the parties renegotiated the pricing in light of the findings.

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Receivables that grow faster than revenue are rarely just a timing issue. The explanation usually sounds reasonable: a large shipment at quarter-end, a temporary extension granted to an important customer, or a distributor building inventory ahead of seasonal demand. The accounting may be technically correct, but the diligence question is different: not whether the invoice exists, but whether the cash will arrive under normal commercial terms. The diagnostic is straightforward — reconcile revenue growth with cash collections and examine the aging structure. If receivables expand while overdue buckets grow, the business may be financing its customers in order to support reported sales.

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In one recent Ferdinand engagement involving a regional publishing business, the situation was more structural. A significant share of revenue came from large online retailers whose market power allowed them to delay payments well beyond contractual terms. Management acknowledged that receivables from these counterparties often remained outstanding for extended periods, but argued that refusing shipments would risk losing distribution access entirely. The result was a business model where reported sales were real in accounting terms but converted to cash slowly and unpredictably. Once the receivables cycle was normalized to realistic collection patterns, the company’s sustainable working capital requirement — and therefore the economic attractiveness of the business — looked materially different from the headline financial statements.

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Change-of-control clauses above 30% of revenue make this a deal-structuring requirement, not a legal finding to note and move on from. A price reduction does not solve this problem — if those contracts terminate, the revenue loss is identical whether you paid less for the company or not. The most reliable mitigation is obtaining consents before closing. That means identifying the relevant counterparties during DD, approaching them before the SPA is signed, and either securing written waivers or, where the counterparty uses the moment to renegotiate, understanding the revised terms before you commit to a price. Sellers sometimes resist this on the grounds that customer outreach will disrupt the relationship or signal instability. That resistance can be a signal worth examining regarding how transferable those relationships actually are.

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Undisclosed tax jurisdiction exposure requires separating two situations that look similar but are not. Exposure that was genuinely unknown to the seller — because the company has never had a multi-jurisdiction compliance review — calls for quantification, specific indemnification in the SPA, and an escrow against the identified amount for the relevant limitation period. Exposure that management was aware of but did not disclose is a different problem entirely: it raises a question about what else was known and not surfaced, and whether the representations in the SPA can be relied upon at all. The distinction matters for how you structure protection and how you price the residual risk of further items you have not yet found.

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Projections implying market share gains without competitive basis rarely get the scrutiny they deserve because they are buried in assumption schedules and presented as conservative. The diagnostic is straightforward: take the projected revenue growth rate, subtract the independently verifiable market growth rate for the sector, and ask where the remainder comes from. If the business is projected to grow at 12% in a market growing at 4%, it is implicitly claiming 8% of annual net market share gain. From whom? If the seller cannot name the specific competitors losing share to this business and explain the mechanism, the projection is a hope, not a forecast. Apply the market growth rate as your base case and treat any upside from share gain as an earnout scenario rather than a purchase price input.

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In one recent buy-side engagement, Ferdinand advised an investor reviewing the acquisition of a Central European manufacturer of highly specialized industrial products. Management’s business plan projected double-digit revenue growth over the next five years. However, a top-down market review suggested that the relevant European market was mature, with underlying demand broadly tracking industrial production and construction activity and therefore growing only in the low single digits. 

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When the forecast was decomposed, the implication became clear: the company’s projections required sustained market share gains rather than market growth. Yet the plan did not identify which competitors would lose that share or what structural advantage would drive the shift. The valuation was therefore rebuilt using market growth as the base case, with any potential share gains treated as upside rather than a core assumption — a reminder that when projections materially exceed industry growth, the key diligence question is not whether the numbers reconcile but where the implied market share comes from.

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Why Standard DD Processes Are Structurally Designed to Miss These Gaps

The gaps above are not random. They cluster around a specific structural problem with how buy-side diligence is typically scoped and executed.

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Financial DD teams are engaged to verify reported figures and identify non-recurring items. That is what the scope says and what the deliverable covers. It is not the same as asking whether the reported figures are a reliable guide to future performance under new ownership. A QoE report that confirms EBITDA is €4M and that €400K of non-recurring items have been added back is technically accurate. It does not tell you whether that €4M will persist after the founder exits.

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In a recent buy-side engagement, Ferdinand advised an international strategic investor on the acquisition of a specialty healthcare distributor. During the process, the seller attempted to renegotiate the price based on an apparent increase in projected EBITDA for the actual year.

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While the figures reconciled in the financial due diligence, a deeper gross margin analysis showed that the uplift was largely driven by transactions with related parties rather than genuine market-based growth. In other words, the EBITDA bridge was technically correct but economically misleading.

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This is exactly where a solid transfer pricing analysis becomes critical: without understanding the pricing of intra-group transactions, the buyer could easily treat reported margin expansion as sustainable performance when in reality it may normalize under independent ownership.

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The checks that catch the most expensive post-acquisition surprises, owner dependency, management capability, revenue quality, systems fragility, operational tax exposure, related-party normalization, require a different type of engagement: one where financial analysis and commercial judgment work together, where the advisor is willing to raise findings that are uncomfortable for the deal, and where the scope is built around what actually destroys value rather than what is easiest to verify.

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In mid-market transactions in Hungary and Romania, there is an additional layer: the local market knowledge required to identify the specific risk profile of CEE mid-market businesses. Accounting basis differences, restitution title risk, FDI screening timelines, TUPE mechanics in asset deals, related-party structures driven by local tax efficiency, these do not appear in international templates because they were not written for this market.

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Ferdinand Investment Partners embeds financial due diligence into the full buy-side M&A process, not as a standalone deliverable, but as a continuous input into valuation, negotiation, and deal structuring. Our buy-side engagements include market-specific DD coverage built around the actual risk profile of transactions in Hungary and Romania.

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If you are evaluating a target and want to understand the risk profile before committing further, the right conversation to have is before you sign the LOI, not after the first post-acquisition surprise.

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Conclusion

A due diligence process that works through financial statements, legal title, commercial contracts, and regulatory compliance is a standard process. What is often neglected are issues that do not appear clearly in documents: maintenance capex that has been deferred for several years, customer relationships sustained by the founder's personal involvement, working capital temporarily compressed ahead of a sale, or property that has been occupied without dispute while a restitution claim slowly moves through the Romanian legal system.

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Post-acquisition disputes often arise not from information that was deliberately hidden, but from issues that were never examined closely because the due diligence scope followed a generic template. The template was not designed specifically for this market, and finding experts who have genuinely done enough transactions in Hungary or Romania to know the differences is challenging.

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Ferdinand Investment Partners advises corporate acquirers, private equity firms, and independent buyers on mid-market transactions across Hungary, Romania, and the broader CEE region. Our buy-side engagements combine financial due diligence, valuation, and commercial analysis, with partner-level involvement at every stage of the process.

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If you are evaluating a target in Hungary, Romania, or across the CEE corridor and want a due diligence process led by partners with direct transaction experience in this region, book a confidential call today and let one of our senior partners guide you through every stage of the transaction.

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Due Diligence for Buying a Mid-Market Company FAQ

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How do I know whether the QoE report I received from the seller's advisor is reliable enough to use, or whether I need to commission my own?

You should always commission your own. A vendor due diligence (VDD) report prepared by the seller's advisor is produced to support the seller's valuation case. That does not mean it is dishonest, most are produced to a professional standard, but the scope, the materiality thresholds, and the presentation of findings are all calibrated to a buyer audience in a way that serves the seller's interests. Specifically: VDD reports tend to apply QoE adjustments that maximize reported EBITDA, use working capital analyses that anchor to the pre-sale period, and avoid raising findings that would reduce price or introduce deal uncertainty. Your own QoE engagement should independently recalculate the normalized EBITDA, run your own NWC analysis on a 24–36 month normalized basis, and verify the cash independently. If a finding from your team conflicts with the VDD, that conflict is itself informative about where the commercial disagreement in the deal lies. Use it in negotiations.

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The target's EBITDA has been consistent for three years. Why would the due diligence reveal a different picture from what the financials already show?

Because consistent EBITDA is not the same as sustainable free cash flow, and three years of consistent reported numbers can coexist with three years of systematically deferring the investment needed to sustain them. The most frequent mechanism: capital expenditure running at 40–60% of depreciation for three or more years, while EBITDA remains flat. The business is consuming its asset base rather than reinvesting in it. The EBITDA looks stable; the underlying productive capacity is declining. This does not appear as a red flag in financial statements, it appears as a healthy P&L attached to aging equipment, underpaid key staff, and an IT infrastructure that has not been upgraded since 2019. A second mechanism: consistent EBITDA achieved through working capital management. Payables stretched to 90 days, receivables at 45 days, inventory drawn down. The P&L is clean; the operating model is running on borrowed time. Neither of these shows up if DD stops at confirming that the reported figures are accurate. They show up when DD asks whether the business can generate those figures under normal operating conditions after closing.

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The seller insists the business is not owner-dependent because there is a full management team in place. How do I actually test whether that claim is true?

The test is not the org chart, it is whether the management team has actually exercised independent judgment on decisions that matter. Four specific checks. First, contract signatory review: go through the five largest customer contracts and identify who signed them. If it is consistently the founder, the relationship is the founder's, not the company's. Second, independent management interviews: ask each member of the management team the same strategic questions separately. Ask them to explain the pricing strategy, the three most significant competitive threats, and the last major decision that cost the company money. If answers are consistent and specific, the team is functioning independently. If they defer to the owner or give vague answers, they are not. Third, customer reference calls outside the seller's provided list: request the full customer list and choose reference accounts yourself. Ask customers directly who their primary contact is and what they would do if that person were no longer there. Four, operational observation: spend time on site unannounced if possible. Which decisions get escalated to the founder? Who do staff call when a problem arises? The informal decision-making map is more informative than the formal hierarchy.

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What is the most reliable signal that a seller is managing working capital before the sale, and how does it affect the purchase price negotiation?

The most reliable signal is a material shortening of accounts receivable days combined with a lengthening of accounts payable days in the 12–18 months before the sale process formally began, not just before the LOI was signed. Run the AR days and AP days calculation month-by-month for 36 months. If AR days moved from a stable 65-day average to 45 days in the year before the process, customers were called and pushed to pay early. If AP days moved from 45 to 80 days in the same period, suppliers were asked to wait. Neither of these changes represents improved underlying business performance. They are cash extraction mechanisms that transfer cash from the business to the pre-sale balance sheet and leave the buyer to fund the normalization post-close. The practical impact on the NWC peg: the seller will propose a peg anchored to the inflated pre-sale balance sheet. Your counterproposal should be anchored to the 24–36 month normalized average, excluding the pre-sale management period. The gap between these two figures is the amount the buyer would otherwise fund post-close in the form of a working capital infusion that was not modelled in the original valuation.

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How should DD findings change the deal structure rather than just the price?

Price adjustment is the first lever, but it is not always the right one. Certain findings are better addressed through structure than through a lower entry price, because the risk is contingent rather than certain. Three specific examples. First, owner dependency where the founder is the primary customer relationship holder: rather than reducing price, structure a meaningful earnout tied to revenue retention over a 12–24 month period post-close. This aligns the founder's financial interest with the outcome you need, customer relationship continuity, rather than simply penalising for a risk that may or may not materialise. Second, identified tax exposure that cannot be fully quantified during DD: an escrow mechanism funded at closing, released against a specific trigger (e.g., the relevant audit limitation period passing with no assessment raised), is a more precise instrument than a blanket price reduction. The seller retains the upside if the risk does not materialise; the buyer is protected if it does. Third, change-of-control clauses in key contracts: the structural response is to obtain signed consents or waivers from the relevant counterparties before closing, not to price in the risk of losing the contract. Pricing in a risk and then losing the contract produces the same economic outcome as not pricing it in, the revenue is gone. The consent requirement is the only real mitigation.

For acquisitions specifically in Hungary or Romania, what is the single most commonly missed regulatory risk that creates real post-closing problems?

The most consistently missed risk is the combination of merger control gun-jumping and FDI screening timeline in transactions involving regulated sectors. In both Hungary and Romania, there are mandatory pre-closing notification requirements, to the GVH in Hungary, to the Competition Council in Romania, and in certain sectors (energy, infrastructure, strategic manufacturing), additional FDI screening that runs on a separate track with its own timeline. Buyers who have primarily executed deals in Western Europe are familiar with EU merger regulation thresholds and assume, incorrectly, that transactions below EU notification thresholds are clear to close. The Hungarian and Romanian national thresholds are independent and lower. A transaction that does not require EU notification can still require Hungarian or Romanian notification, and closing before that notification is cleared constitutes gun-jumping, which carries substantial financial penalties in both jurisdictions. In practice, the fix is straightforward if identified early: file the notification before the SPA is signed or immediately after, build the expected review timeline into the deal schedule, and negotiate interim operating provisions that allow the business to continue normal operations during the review period. The risk is almost entirely a function of not identifying the requirement in time. It is a process management problem, not an insurmountable obstacle, but it becomes an obstacle if it surfaces after closing has already occurred.

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