A red flag in due diligence is a significant finding, anomaly or risk identified during the investigation of a target company that warrants immediate attention from the acquirer and may have material consequences on the transaction — whether on price, on the decision to proceed, or on the protections required in the SPA. Red flags are reported immediately to the acquisition team as they are discovered, rather than waiting for the final due diligence report.

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Common financial red flags include: significant discrepancies between management accounts and audited accounts, unusual revenue recognition patterns (booking revenues early, round-tripping), quality of earnings issues (recurring "non-recurring" charges, aggressive normalisation adjustments), customer concentration above 20–30% on a single client, undisclosed related-party transactions, covenant breaches in existing financing agreements, or unexplained cash flow divergences from reported profits.

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In the Franco-Swiss context, specific red flags include: undocumented transfer pricing arrangements within Franco-Swiss groups, hidden liabilities related to Swiss pension obligations (LPP), incorrect withholding tax treatment of dividends, or incomplete capital contribution reserve (RAP) documentation affecting future distribution capacity.

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Example: during financial due diligence of a Swiss manufacturing SME, Hectelion identifies that CHF 380,000 of annual revenue is booked under long-term contracts whose completion is significantly behind schedule — a revenue recognition red flag. After investigation, CHF 280,000 must be deferred, reducing normalised EBITDA by CHF 280,000 and the offer price by CHF 1.4 million at 5x EBITDA.

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At Hectelion, our due diligence approach is built around early red flag identification, allowing acquirers to make informed decisions with full transparency before committing to a final price.