Process Solutions Services

Why is financial and tax due diligence essential before a company acquisition?

Imagine a situation where a promising company acquisition quickly turns into a nightmare. For example, an investor who purchased a company believed they were acquiring a stable, profitable business based on solid financial foundations – but it was soon discovered that the accounting records had been manipulated to conceal significant tax arrears and insolvent partners. To avoid such situations, financial due diligence and tax due diligence should be applied – tools that reveal the true nature of companies.

12-03-2025

Hungary

Tax

Financial due diligence , Tax due diligence, Company acquisition, Uncovering hidden risks

Case study from the real-world: Uncovering hidden risks

One of our clients, a foreign investor group, approached us before purchasing a Hungarian medium-sized company. The target company showed impressive annual growth and based on the financial statements; the company appeared to be profitable. However, during the due diligence process, it was revealed that:

  • Significant part of the sales revenue was tied to one partner with limited solvency.
  • It was discovered that several tax returns of the Company were inaccurate and did not comply with the relevant legal requirements in force at the time, which overall posed a significant tax risk.
  • There was a difference in value of millions between the petty cash balance in the financial statements and the actual cash holdings.
  • In light of the information revealed, the parties renegotiated the purchase price, allowing the investors to save significant costs thanks to our experts.

What does a due diligence examine and why is it important?

The  purpose of pre-acquisition due diligence is to understand all aspects of the company to be acquired. Here are some key areas:

Clarification of financial situation

A thorough financial and accounting risk analysis reveals the problems inherent in the books, such as:

  • Deficiencies in accounting policy and bookkeeping that do not comply with the law.
  • Debts and other obligations.
  • Fluctuations in sales and costs and their possible causes.
  • Partners with inappropriate willingness to pay.

Identifying Tax Risks

Incorrect application of tax rules can result in penalties amounting to millions. During the due diligence, the following can be identified:

  • Unsubmitted tax returns and incorrect tax calculations.
  • Ignoring or incorrectly applying changes in legislation.
  • Inadequate VAT handling or lack of transfer pricing documentation.

Company valuation

During the due diligence, items that may distort the company’s fair value can be identified. This is particularly important when calculating the company valuation based on  EBIT or EBITDA.

Trends and forecasts

More accurate forecasts for the future can be made based on data from previous years:

  • Analysing revenue trends helps to determine the company’s growth potential.
  • Analysing operating costs and a profitability analysis reveals weaknesses in the company’s operations.
  • The adjusted EBIT or EBITDA calculation prepared during the due diligence process helps filter out any one-off costs or revenues that may distort the company’s results, providing a more realistic starting point for determining the company’s value.

Why is it worth involving experts?

Proper due diligence service not only serves to uncover risks, but also provides security for our clients. The costs of a poorly managed acquisition may often exceed by the fees paid for due diligence.

The expertise and detailed analysis of our specialists will help you avoid hidden pitfalls and ensure that your investment really pays off.

Don’t let invisible risks jeopardize your decisions!

If you want to get the whole picture before the company acquisition, contact us! We’ll help you ensure that our financial and tax due diligence provides a solid foundation for successful business decisions.