The traditional diligence layer that audits historical financials, accounting practices, revenue quality, and working capital. Financial DD answers "what happened" and "how much is this worth." It does not measure the operational factors (culture, execution, leadership alignment) that determine whether the company will perform post-close. Also known as a Quality of Earnings (QofE) analysis.
Financial DD validates the headline numbers on the LOI, normalizes earnings for run-rate, and flags accounting irregularities that affect valuation. But it says nothing about whether the company can deliver the projections. A company with normalized EBITDA of 10 million but a Zoe Score of 50 is riskier than one earning half that with a 78 score. Financial DD answers what the business earned; operational DD answers what it will earn. Both are mandatory for deals over 25 million, and increasingly so as multiples tighten and integration leverage becomes the hidden moat.
Financial DD sits outside Zoe's core methodology but is deeply relevant to Financial Vitality dimension scoring. Where Zoe pulls revenue, margin, and burn data directly from accounting systems (QuickBooks, NetSuite, Stripe), a traditional Quality of Earnings analysis normalizes and validates that data. Zoe's Financial Vitality score assumes the underlying financials have been through QofE review; if they haven't, the Zoe Score is conditional on diligence confirming the accounting quality first.
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