Due Diligence in M&A Transactions: Financial and Tax Considerations

Financial and tax due diligence represents a critical component of merger and acquisition transactions, enabling acquirers to identify risks, validate assumptions, and inform transaction structuring and pricing. For finance directors leading acquisition processes or managing sell-side due diligence, understanding key focus areas, common risk areas, and effective due diligence processes is essential for achieving successful transaction outcomes.

Financial Due Diligence Framework

Financial due diligence should provide comprehensive analysis of target company financial performance, position, and prospects, enabling acquirers to understand the quality of earnings, identify risks and opportunities, and validate transaction assumptions. Finance directors should ensure that due diligence processes are structured to address key areas systematically.

Key areas typically covered in financial due diligence include quality of earnings analysis, which assesses the sustainability and normalisation of earnings; working capital analysis, which evaluates working capital requirements and trends; and balance sheet review, which identifies assets, liabilities, and potential risks or opportunities.

Tax Due Diligence and Risk Assessment

Tax due diligence identifies tax risks, exposures, and opportunities in target companies, enabling acquirers to understand tax positions, assess potential liabilities, and inform transaction structuring. Finance directors should ensure comprehensive tax due diligence covering all relevant taxes and jurisdictions.

Common tax risk areas include unresolved tax disputes, uncertain tax positions, transfer pricing issues, and compliance failures. Finance directors should also identify tax opportunities, such as unused tax losses, capital allowances, and R&D tax credits, which may enhance transaction value.

Valuation and Pricing Considerations

Due diligence findings inform transaction valuation and pricing, with identified risks potentially affecting purchase price or transaction structure. Finance directors should ensure that due diligence processes provide sufficient information to support valuation decisions and price negotiations.

Quality of earnings adjustments, working capital normalisation, and identification of one-off items enable acquirers to understand underlying business performance and inform valuation. Finance directors should ensure that these adjustments are well-documented and supportable.

Post-Transaction Integration Planning

Due diligence should also inform post-transaction integration planning, identifying areas requiring attention, system integration needs, and process improvements. Finance directors should ensure that due diligence findings are communicated effectively to integration teams and that appropriate action plans are developed.