Why due diligence is so important?
Financial due diligence is an analysis that represents a detailed check, research and analysis of the company's business, key problems and risks it faces, as well as drivers of profitability and cash flow.
This analysis is most often conducted in company sales or purchases transactions, but also for internal business purposes.
Financial due diligence usually includes the following activities:
- analysis of the company's business
- analysis of the company's financial position
- analysis of key accounting documents
- analysis of contracts concluded with suppliers, customers and employees
- analysis of income and expenses or actual earnings of the company
- analysis of EBITDA and other key performance
- reality of financial projections
- advising on the purchase price
What are a usual parts of due diligence performed by consulting firm?
Internal controls review
• Support in review of processes of Subject of acquisition, internal controls and procedures
• Support to identify specific areas of weakness in systems and controls and make recommendation for their improvement
Account receivables and placements
• Checking credit rating of all debtors and investigate if receivables are evaluated per fair value.
• Support in checking valuation of AR and placements in line with local GAAP and IFRS
• Tax treatment of impairments and write offs
Due diligence of inventories
• Support in checking valuation of stock in line with local GAAP and IFRS, analyzing legally required process of annual stock counting and their results
• Tax treatment of impairments, write offs and shortages
Commitments and contingences
• Support in understanding an amount of committed liabilities and potential liabilities that can arise from business arrangements of Subject of acquisition
• Support in review and analysis of Subject of acquisition’s litigations with business partners and authorities
• Support in review main financial elements of agreements with customers, suppliers and banks
• Support in review results on audits and tax controls
• Potential liabilities in term of legal interest
Provisions and impairments
• Checking if the Subject of acquisition has performed appropriate provision and impairments according of the local GAAP
• Analysis of legally required reconciliation with debtors and creditors
Due diligence of trade liabilities
• Support in confirming a completeness of liabilities recognition in balance sheet
• Reconciliation of liabilities according to the Law on accounting
• Support in review elements from agreements with suppliers and indication of main risks.
Fixed assets and intangibles
• Support in analysis legally required annual counting of fixed assets and intangibles, their existence and valuation
• Explanation of tax depreciation rates and their impact on net profit.
• Explanation of tax treatment of fixed assets and implication of CIT, VAT and others taxes.
• Tax treatment in purchase of intangibles
Specific local GAAP requirements and tax rules
• Checking legally required internal acts in line with local legislations (Rulebook of accounting, annual stock and others)
• Explanation of local “Chart of accounts” and its implications
• Presentation of general and specific tax rates applicable on Subject of acquisition: Corporate income tax, Withholding tax, Personal income taxes, Social contributions, VAT, Customs, tax on properties, admin taxes.
• Support in review of corporate income tax return and tax balance sheet (Audit and analysis of tax deductible costs, non- deductible costs, impairments, capital gains etc.)
• Support in review of Value added taxes returns for observed period
• Support in review of withholding tax liabilities
• Support in review of Transfer pricing if the Subject of acquisition has related parties
• Support in review an accuracy of salaries calculation including personal taxes and contributions
• Support in understanding of labor relations
• Explanation of main rules for labor relation and potential liabilities
Estimation of potential penalties and possibilities for optimization
• check whether the balances in books are equal with balances at tax authorities’ books.
• Calculating potential penalties for Subject of acquisition due to potential violation of local laws.
• Indication of potential savings in taxes if they are possible per local laws.
Why to choose our team for performing a due diligence?
Due to the specifics of each individual transaction in which the Financial due diligence analysis is necessary, WTS expert team makes the necessary adjustments to the activities in order to obtain more relevant results of the analysis itself.
Of crucial importance in transactions where it is necessary to perform financial due diligence is also tax due diligence in order to obtain a complete picture of your company's business.