The search for “black holes”
Investing in a business which is later found to have serious asset quality problems or unrecorded liabilities is a career-limiting move. But the detection of such problems is not simple in a business to which the investor has restricted access, possibly in a foreign country and language, under different accounting standards.
How we can assist
Financial and tax due diligence are core activities for us, and we have been almost continuously engaged on substantial transactions (as well as many smaller ones) over recent years.
While no guarantee can be given by any advisor, even in the case of a full audit of the target, we have extensive relevant experience.
A typical scope might comprise the following, although every case is different and every case deserves a tailored approach:
- Review of the financial statements and any other initial information made available, to identify risk areas at an early stage
- Review of the audit work performed by the company’s auditors (if any) as of the most recent date, to gain a further understanding of the company’s business and financial position
- Review of the quality of the company’s assets: investigation of the contents of each main asset category (e.g. inventories, receivables) and comments on any identified need for impairment provisions
- Review of credit facilities used, securities given and compliance with key covenants
- Review of potential/contingent liabilities and commitments, or missing provisions; inquiry as to whether all sales and other transactions have been properly recorded
- Review of pension / retirement pay provisioning
- Review of potential tax issues:
- Review of corporate, VAT, stamp tax, payroll tax and social security declarations and whether the related declared liabilities have been paid on time to the tax office
- Review of add-backs and deductions shown in the corporate tax calculations
- Review of whether known risk areas such as thin capitalisation may be applicable to the company
- Review of investment incentives earned and claimed by the company or available for carry-forward
- Inquiry as to any tax investigations, tax disputes or legal cases ongoing or threatened against the company
- Review of any tax certification reports the company may have obtained from tax consultants, and focus on any issues identified in such reports
- Review of any merger or reorganisation transactions which may have occurred at the company in recent years
Other areas where balance sheet due diligence may be applicable include consideration of management’s projections, reconciliations between statutory and IFRS, US GAAP or managements accounts.
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