Related party issues
You need to know how a company’s results have been affected by its transactions with related parties: with other companies in the same group, or with other parties more loosely linked to shareholders, directors or management.
You need to assess whether any balances due from related parties will be actually collectible in practice.
In the event that you are investing in an entity that will be carved out from an existing larger business, you need to know how common costs are allocated in the accounts. If the allocations are unrealistic at present, the business’s profitability will change in future when it is a stand-alone business.
You need to understand how balances due to or from shareholders have arisen, especially because entries to these accounts are sometimes used to cover up unrecorded sales or costs in the business.
You also need to know whether a company’s continued operation might be threatened by the withdrawal of services hitherto provided by related parties (see dependencies).
Lastly, the transfer prices used in the past may also create tax risks and potential penalties.
How we can help you
Our due diligence work normally includes a study of related party transactions and balances, highlighting both the financial and tax consequences, as well as any operational dependency.
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