Conducting Financial Due Diligence

Financial Analysis of Target

  • Performing financial due diligence of the Target with structured overview of trends, interpretation of values and implications of historical results with special emphasis on:
    • Quantities, revenue and implied average selling prices with related cost of goods sold and gross profit margin analysis by (i) product and service category (ii) by customer or group of customers, (iii) by geography
    • Headcount and salary costs by employee and department
    • Analysis of other operating expenses (rent, marketing, travel, energy, vehicles, memberships, banking services, insurance, intellectual services, maintenance, telephone, Internet, IT, representation, other operating expenses)
    • Normalization of EBITDA by identification of non-recurring and non-core revenues and expenses, non-expensed bad debts, intra-group management fees, additional costs needed for business to function as independent entity (if there are shared functions within the group), etc.
    • Receivables by customer including aging structure, degree of collectability, and average collection period in days
    • Inventory structure by product category, inventory turnover in days by product category and degree of obsoleteness of inventory
    • Purchase volumes by supplier, accounts payable by supplier and average payment period in days
    • Operating and cash cycle
    • Analysis of other current assets (loans given, advanced payments for goods, short term loans given to third parties, receivables from employees, etc.) and other current liabilities (VAT and other tax obligations, liabilities towards employees, advances received, etc.)
    • Analysis of net working capital
    • Analysis of long term depreciable assets and historical capital expenditures (CAPEX) including assessment of future needs for CAPEX (property, plant, equipment, intangibles)
    • Analysis of other long term assets (land, shares in other companies, deposits and various guarantee payments, deferred tax assets, etc.)
    • Identification of non-operating assets and degree of its marketability at fair value
    • Structure of short and long term debt by creditor including repayment schedules for outstanding loans and financial leases, analysis of leverage ratios such as net debt to EBITDA, debt to equity, debt to cash flow including identification of a need for refinancing and/or restructuring of existing debt
    • Analysis of other long term liabilities (warranties, deferred tax liabilities, pension liabilities, etc.)
    • Calculation and analysis of operating, investing, financing and free cash flow

Conducting Tax Due Diligence

Tax Analysis of Target

  • General
    • Minutes, resolutions and other documents issued by Tax Authority related to tax inspection
    • Individual and cumulative review of the obligations / receivables of the tax payer from the Tax Authority at each year end
    • Balance sheet at each year end
    • All business agreements of the company
  • Corporate income tax (CIT)
    • Annual CIT returns with corresponding addendums
    • Overview of tax losses that are submitted to Tax Authority
    • Depreciation calculations at each year end
    • Specification of non-deductible expenses stated in the CIT return
    • Overview of goods, services and payments given to owners, co-owners and their family members for private use (by type of payment costs, for example - means of transport, low interest on loans, reimbursement expenses, etc.)
    • Overview of deferred tax liabilities and assets at each year end
    • Overview of value adjusted and written off receivables which were subsequently paid
    • Overview and calculations of gifts and donations
    • Analysis of representation expenses, advertising costs, costs of official vehicles, costs of transactions between related parties, donations and value adjustments / write-offs
    • Analysis of liabilities towards foreign suppliers
    • Used tax reliefs / aid in relation with reduction of CIT base
    • Analysis of transactions between the company and parties who are in any mode related with the company
    • Agreements with related parties, including agreements for loans concluded between related parties
    • Calculation of interest on loans incurred between related parties
  • Withholding tax (WHT)
    • Calculations of withholding tax for fee payments to foreign recipients and proofs of paid WHT
    • Certificates of residence and confirmations regarding tax exemption for withholding tax (if Double Treat Agreement is on force)
    • Analysis of WHT liabilities and WHT costs
  • Value added tax (VAT)
    • Annual VAT returns
    • Monthly VAT returns
    • Deviations between monthly VAT returns and annual VAT return
    • Calculations of VAT for self-consumption and deliveries free of charge (deliveries to the owners, employees, benefit in kind etc.)
    • VAT books of outgoing and incoming invoices
  • Personal income tax (PIT)
    • Analysis of employment agreements
    • Salary calculations / payment lists
    • Monthly salary recapitulations
    • Analysis of management agreements, service agreements, and author agreements
    • Benefits in kind – review of goods and services provided to employees and other private persons for car used
    • Review of other remuneration provided to employees (e.g. Christmas allowances, vacation allowances, transportation to and from place of work) and their treatment with PIT and obligatory contributions
    • Review of paid severance payments
    • Review of travel orders with all addendums
    • Monthly and annual forms that need to be submitted to the authorized institutions related to income payment
  • Other taxes
    • Contracts regarding real estate acquisition, real estate tax resolutions related to payment of real estate tax, proofs for real estate tax payment
    • Overview of other relevant taxes and contributions

Conducting Legal Due Diligence

Legal Analysis of Target

  • Statutory issues
    • Founding and organization, privatization and similar issues
    • Investments into company in form of contributing real estate and equipment
    • Decisions of general assembly, supervisory board, and management board
  • Assets
    • Ownership and occupancy of real estate and other assets including mortgages and pledges over assets
    • Possession and validity of appropriate permits and licenses
    • Issues related to maritime and public goods
    • Concessions and approvals of relevant bodies
    • Intellectual property, rights and non-tangible assets
  • Court proceedings
    • Current status and likely outcome
  • Contracts and legal relations
    • Rents
    • Insurance
    • Loans
    • Suppliers
    • Employees
    • Customers
    • Other agreements and contracts
  • Labor related issues
    • Management contracts and work regulations
    • Collective agreements
  • Other relevant issues
    • Environment and customer protection
    • Competition law and regulation
    • Subsidies, etc.