Be ready before the data request arrives.
Financial due diligence preparation for Indian startups. The reconciliations, records and metric definitions an investor's diligence team will test, put in order while there is still time to fix what they find.
Diligence is a test of evidence, not of the business
By the time financial due diligence starts, the investor already believes in the business. They have met you several times, read the deck, done their market work and, usually, signed a term sheet. What follows is not a second opinion on whether your company is good. It is a check on whether what you said can be verified.
That's why strong companies lose months in diligence. The revenue is real, the growth happened, the customers exist. But the revenue in the deck is calculated one way and the books another, the metrics were never defined in writing, the GST credit doesn't reconcile, and nobody can produce the customer contracts without asking three people.
Every gap costs something. Time, first, while an analyst tries to reconcile numbers you could have reconciled for them. Then bargaining room, because uncertainty gets priced. In the worst cases, an indemnity or a holdback in the legal documents that follows the founders for years.
All of it is preventable, and none of it needs to be done in the three weeks after a term sheet.
What a diligence team actually does
Financial due diligence varies by deal size, but the core exercises are consistent. Knowing them makes preparation concrete rather than vague.
- Proof of cash
- Revenue and costs in the books traced to money actually moving through the bank, month by month, adjusting for receivables, GST and TDS. This is where unreliable books show up first.
- Quality of earnings
- Reported earnings adjusted for one-off, non-recurring and non-market items: legal settlements, founder salaries below market, revenue recognised early, missing provisions.
- Revenue quality
- How much is recurring and contracted, how concentrated customers are, how revenue is recognised, and whether contracts support the numbers.
- Metric rebuild
- Your key metrics reconstructed from raw subscription or transaction data, then reconciled to the books and to what you reported monthly.
- Statutory and tax review
- GST returns against books and against supplier filings, TDS deducted and deposited, PF and ESIC, and any notices or disputes.
- Debt-like items and commitments
- Obligations that will cost cash even though they aren't borrowings: unpaid dues, unprovided gratuity, customer advances, deferred revenue, lease commitments.
The three reconciliations that decide how the process feels
If you do nothing else before a raise, do these. Each one takes hours rather than weeks once the data exists, and each is the first thing a diligence team builds.
- 01Revenue to books to bank. Customer-level revenue that ties to invoices, to the revenue in the books, and to receipts in the bank after receivables, GST and TDS. Do it for every month of the last two years.
- 02Metrics to raw data. ARR, customers, churn, order volume or whatever you report, rebuilt from the source system and reconciled to what you told investors each month. Where a definition changed, restate the history.
- 03Tax to filings. Input GST claimed against what suppliers reported, output GST against revenue, TDS receivable against what customers reported, and every statutory due paid on time.
A company that hands these over unprompted changes the tone of the whole exercise. The diligence team spends a day checking your work instead of two weeks rebuilding it, and the questions that follow are about the business rather than about whether the numbers can be trusted.
What usually comes up, and what to do about it
- Revenue recognised on invoice rather than delivery, especially annual prepaid plans and milestone projects. Fix the policy, restate the affected months, and be ready to explain the change.
- Gratuity never provided for. Get an actuarial valuation and book the liability rather than letting the diligence team find it.
- Founder salaries well below market, which reviewers adjust downward in adjusted earnings. Decide your answer in advance: either normalise them or explain the plan.
- GST input credit claimed without support from supplier filings. Reconcile, reverse what isn't supportable with your CA, and document it.
- Contractors who function as employees, with no PF or ESIC. A legal and tax question for your advisers, and one that gets more expensive the longer it runs.
- ESOP grants promised in offer letters but never approved or recorded. Reconstruct the record, get board approval where it's missing, and reconcile the pool to the cap table.
- Related party transactions at non-market rates, undocumented. List them, price them properly, and get the approvals.
- Cap table that doesn't match the statutory registers or past filings. Fix it with your company secretary, because this one stops a round dead.
Notice how many of these are fixable in a quarter and awkward in a week. That's the entire argument for preparing early.
A readiness review, worked through
An illustrative example of what the first reconciliation turns up. A software company with ₹9 crore of annual revenue, preparing to raise. Every figure is invented.
| Last financial year | As reported to investors | After reconciliation | Why |
|---|---|---|---|
| Revenue | ₹9.20 crore | ₹8.74 crore | Two annual prepaid contracts recognised in full on invoice |
| ARR at year end | ₹10.10 crore | ₹9.35 crore | Signed but not live contracts counted, and one-off setup fees included |
| Gross margin | 78% | 72% | Customer support and implementation moved into cost of delivery |
| EBITDA | minus ₹1.10 crore | minus ₹1.46 crore | Gratuity provision and an accrued vendor bill added |
None of these is fraud, and all four are ordinary. But if an investor meets the first column in a deck and the second column in diligence, the conversation stops being about growth and starts being about trust.
Found six months earlier, the same four items are a policy change, a definition written down, a reclassification and a provision. The company then reports the second column consistently for two quarters, and diligence confirms rather than corrects it.
How the preparation runs
- 01A readiness review: the three reconciliations attempted on your current data, to find where they break.
- 02A written gap list, in priority order, with what each gap would look like to a diligence team and what fixing it involves.
- 03The fixes themselves, alongside your CA and company secretary, who own filings, tax positions and statutory records.
- 04A metric dictionary and a restated metric history, so the numbers you report from now on are the numbers that will be rebuilt later.
- 05A data room built in the structure a diligence team expects, populated as things are fixed rather than at the end.
- 06A dry run: the questions a reviewer would ask, answered in writing, with the evidence attached.
Some of it is work only your team can do, because it depends on contracts and systems you own. Some is work your CA should do. The part Simplify covers is knowing which questions are coming, which gaps matter and which don't, and making the answers evidenced rather than asserted.
Answering well while the review is running
Preparation decides most of the outcome, but how a company behaves during the review matters too. A few habits make a visible difference.
- One owner on your side, usually whoever runs finance, with the founder available for commercial questions. Scattered replies from several people create contradictions.
- Answer in writing, with the document attached. A verbal explanation has to be re-asked later in a form someone can file.
- Keep a log of every question and answer. Reviewers ask the same thing in different ways, and your answers should match.
- Say 'I'll confirm and come back today' rather than guessing. A wrong number given confidently costs more than a short delay.
- When a finding is right, agree it, quantify it and say what has been done. Defending an indefensible number is the fastest way to have everything else re-examined.
- Keep the business running. A close that slips because everyone is answering diligence questions creates a new problem next month.
When to start
Six months before you intend to raise is comfortable. Three months is workable. After a term sheet is signed is possible but expensive, because everything found then is found by someone whose job is to find it.
There's a second reason to start early that has nothing to do with the round. The same reconciliations that satisfy a diligence team also tell a founder whether their own reporting is true. It's common for a readiness review to find that reported revenue for a quarter was overstated by timing, or that a customer everyone thought was profitable isn't. Better to know that while you can still act on it.
If you aren't raising at all, most of this work still pays for itself, because it is simply good record keeping with a deadline attached.
What you'll have at the end
- Monthly reconciliations from revenue to books to bank, for the period an investor will examine.
- Metrics rebuilt from source data, with definitions written down and history restated where needed.
- Tax reconciliations for GST and TDS, with any exposure quantified and either regularised or disclosed.
- A schedule of your own adjustments, with evidence, so you arrive with a view on adjusted earnings rather than reacting to someone else's.
- A data room organised the way diligence teams read one, with a document index.
- A short written summary of known issues and their status, which is the single most reassuring document a founder can hand an investor.
That last item surprises founders. Disclosing known issues with numbers attached builds more confidence than a clean-looking pack that falls apart on the second question. Investors deal with imperfect companies every day. What they can't price is a founder who doesn't know their own gaps.