Financial due diligence is an examination of a target company’s financial records, performance, liabilities and cash position before an acquisition. It allows a buyer to check whether the information presented by the seller is accurate and whether the business can support the financial expectations used to justify its asking price.
Financial Due Diligence in Ireland should consider the company’s trading history, accounting practices, tax position and financial commitments. The review should also identify unusual transactions, weaknesses in financial controls and matters that could affect the business after completion.
The findings can help buyers decide whether to proceed, renegotiate the price, request further information or withdraw from the transaction. It is not a statutory audit or a guarantee that every risk will be identified. Its scope is agreed according to the nature and size of the acquisition.
1. Review Historical Financial Statements
Start by examining the target’s annual financial statements and management accounts for several financial periods. Look at revenue, operating costs, gross profit, operating profit, net profit, assets and liabilities.
Compare reported results across periods and investigate significant changes. For example, a sharp increase in revenue may appear positive, but buyers should establish whether it came from recurring customer activity, a one-off contract or an unusual transaction.
In Ireland, the Companies Registration Office (CRO) provides access to company filings and financial statements where these are required to be filed. The CRO explains that companies must maintain proper accounting records and prepare financial statements in accordance with the Companies Act 2014 and applicable reporting requirements.
Buyers should compare filed accounts with internal management reports. Differences may arise because of reporting periods, adjustments or accounting policies, but unexplained inconsistencies require further investigation.
2. Assess the Quality and Sustainability of Earnings
A company’s reported profit does not always represent the amount it can generate consistently. Buyers should examine whether earnings come from normal trading activities or include exceptional income, one-off gains and expenses that may not continue after the acquisition.
This review often involves analysing earnings before interest, tax, depreciation and amortisation (EBITDA), where appropriate. However, buyers should not accept adjusted EBITDA figures without checking the adjustments made by the seller. Review questions should include:
- Are sales supported by invoices and customer contracts?
- Does revenue depend heavily on a small number of customers?
- Are operating costs recorded in the correct periods?
- Have unusual or non-recurring items been removed from adjusted earnings?
- Are owner-related expenses likely to change after the acquisition?
- Have margins changed significantly over recent years?
A due diligence analyst may examine these figures, compare reported earnings with underlying records, and investigate adjustments that affect the buyer’s view of maintainable profit.
3. Examine Cash Flow and Working Capital
Profit and cash flow are not the same. A business may report a profit while struggling to collect customer payments or meet supplier obligations.
Review operating cash flow, bank statements, debtor balances, creditor balances and inventory movements. Check how quickly customers pay, whether overdue invoices are recoverable and whether the company relies on extended supplier credit to fund operations.
Working capital deserves particular attention because the amount required to operate the business can affect the final purchase price. Buyers should understand normal working capital levels and agree how working capital will be calculated at completion.
For example, if a company usually needs a certain level of stock and receivables to operate, a significant shortfall on the completion date may require a purchase price adjustment. The sale agreement should define the calculation method and treatment of disputed balances.
4. Identify Loans, Liabilities and Off-Balance-Sheet Commitments
The buyer should establish how much debt the business carries and whether the accounts disclose all relevant financial obligations.
Review bank loans, overdrafts, asset finance, director loans, lease commitments, unpaid supplier balances, guarantees and security granted over company assets. Check repayment schedules, interest rates, covenant requirements and any restrictions that could affect the acquisition.
The CRO’s company records can also help buyers identify registered charges and other available company information. However, a public company search is only one part of the review; buyers should also request loan agreements, lender statements and confirmation of outstanding balances.
The review should distinguish between liabilities that will remain with the acquired business and amounts that must be settled before or at completion.
5. Review Tax Records and Potential Exposures
Tax issues can affect the value of an acquisition long after the transaction has completed. Buyers should examine corporation tax returns, VAT records, payroll submissions, tax payment evidence and correspondence with Revenue. For an Irish company, corporation tax compliance should be checked against the applicable filing and payment requirements. Revenue states that companies generally file their corporation tax return and pay any balance due through ROS within nine months after the end of the accounting period, subject to the relevant statutory rules. The review should consider:
- Outstanding corporation tax, VAT or payroll liabilities.
- Late or amended tax returns.
- Revenue audits, enquiries or unresolved correspondence.
- VAT treatment of significant transactions.
- Tax losses and whether their future use is restricted.
- Uncertain tax positions or transactions requiring further advice.
Financial Due Diligence in Ireland should identify tax matters that could affect the transaction, but specialist tax advice may be needed to assess their legal treatment and potential cost. Buyers should also consider whether the proposed share or asset purchase structure changes the tax risks they may inherit.
6. Check Accounting Records and Financial Controls
Reliable financial information depends on proper records and controls. Buyers should examine how the target records transactions, approves payments, reconciles bank accounts and prepares management reports.
The CRO explains that section 282 of the Companies Act 2014 requires companies to keep adequate accounting records that correctly record transactions and allow their financial position and profit or loss to be determined with reasonable accuracy.
Look for unexplained journal entries, unreconciled accounts, missing invoices, weak approval procedures and delays in preparing monthly reports. These issues may indicate that reported figures need additional testing.
Also check whether the business has appropriate accounting systems and whether important financial knowledge rests with one employee or owner. This can affect the time and cost required to maintain reporting after completion.
7. Examine Forecasts and Future Financial Commitments
Historical performance explains what has happened, but buyers also need to assess whether the business can meet its future plans. Review budgets, sales forecasts, planned capital expenditure, staffing costs and expected financing requirements.
Compare previous forecasts with actual results. If management has repeatedly overestimated sales or underestimated costs, buyers should understand why before relying on new projections.
Forecast assumptions should be supported by evidence such as existing customer contracts, order books, supplier arrangements and realistic operating capacity. Consider how the business would perform if sales declined, costs increased or a major customer left.
Supporting Buyers Through Financial Due Diligence
Finsoul Ireland offers mergers and acquisitions advisory services covering transaction planning, acquisition advisory, financial analysis, M&A due diligence, valuation and deal support. Its due diligence work includes reviewing earnings, working capital, debt, cash flow, tax exposures, and relevant business liabilities. Businesses seeking due diligence services can review Finsoul Ireland’s Mergers and Acquisitions Services to understand the available transaction support.
The scope of a review should reflect the target company’s size, industry, ownership structure, and financial complexity. Buyers should agree on the required records, reporting period, and deliverables before the review begins.
Conclusion
Buying a business without examining its underlying financial position can expose the purchaser to unexpected liabilities, overstated earnings and cash flow problems. A careful review of accounts, earnings, working capital, debt, tax records and forecasts gives buyers a stronger basis for deciding what the business is worth and which risks need attention.
Financial Due Diligence in Ireland should form part of the acquisition process before the buyer commits to final terms. Finsoul Ireland offers mergers and acquisitions advisory support including M&A due diligence, financial analysis and valuation services for businesses involved in acquisitions and other transactions.
Frequently Asked Questions
When should financial due diligence begin?
It should begin once the buyer has sufficient information about the target and before committing to final transaction terms. Early review gives the buyer time to investigate issues and adjust the proposed deal.
How many years of financial records should a buyer review?
There is no fixed period for every acquisition. Buyers commonly request several years of annual accounts alongside recent management accounts, but the review period should reflect the business’s trading history and transaction risks.
Is financial due diligence the same as a statutory audit?
No. A statutory audit examines financial statements and provides an independent audit opinion. Acquisition due diligence is commissioned by a buyer to investigate financial matters relevant to a proposed transaction.
Can financial due diligence change the purchase price?
Yes. Findings about earnings, debt, working capital, liabilities or tax exposures may lead to a revised valuation, price adjustment, additional contractual protection or a decision not to proceed.
Does financial due diligence cover tax and legal matters?
It can identify financial and tax exposures, but detailed legal and tax reviews may require specialist advisers. Buyers should agree on the scope of each workstream before relying on the findings.