Applied AI for Finance and Accounting · Appendix

Financial Due Diligence: 5 Key Terms

By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026

Financial due diligence examines a target company's reported results before a transaction closes, and the quality of earnings report is its primary deliverable. Adjusted EBITDA, built from add-backs that remove one-time or owner-specific items, generally serves as the basis for pricing a deal, while debt-like items and the net working capital peg shape how the purchase price is settled. These terms appear in the due diligence appendix of the free Applied AI for Finance and Accounting course and are common in M&A advisory work.

These terms are taught in Appendix: Financial Due Diligence (Quality of Earnings) of the free Applied AI for Finance and Accounting course; the full course glossary collects every chapter in one place.

Add-back

An adjustment that increases (or decreases) reported EBITDA toward a normalized level, such as removing a one-time cost or normalizing above-market owner compensation.

Adjusted EBITDA

Reported EBITDA normalized for one-time items, owner-specific costs, and run-rate changes, so it reflects the sustainable earnings of the business.

Debt-like item

An obligation that behaves like debt (deferred payments, unfunded liabilities, accrued items) and reduces equity value in a deal even if it is not labeled debt.

Net working capital peg

The normalized level of net working capital a deal sets, often a 12-month average, used to true up the purchase price at close.

Quality of earnings

A buy-side analysis of whether reported earnings are sustainable and representative, adjusting reported EBITDA to a normalized figure a buyer would pay a multiple on.

Put the vocabulary to work: the free calculators and decision guides apply these terms, and the free Applied AI for Finance and Accounting course teaches them in context.