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Introduction to due diligence

A tax practitioner is most likely to become involved in a financial due diligence exercise by reviewing the target’s current and historical tax position on behalf of the purchaser of a company or group of companies.

The overall aim is to provide a report to the management team highlighting key areas of risk, quantifying the potential exposure and suggesting what actions could be taken by management to mitigate these risks. This process is also often required by the banks and other finance providers involved in the transaction to give some comfort that the investment being made is sound, prior to funds being advanced to the acquiring group. As part of the wider due diligence process, detailed checks may also be made concerning the legal and commercial history of the target, depending upon the requirements of the purchaser.

The financial due diligence report usually covers:

1. •

   analysis of the financial position

2. •

   analysis of the forecast results

3. •

   details of the customer base, value and terms of key contracts

4. •

   details of the management team

5. •

   review