What are mergers and acquisitions (M&A)? Right now, they may seem complex transactions, but this handy article aims to leave you feeling a little more enlightened - and confident - about them.
M&A transactions require careful planning and analysis, but don’t feel daunted by the process, which is designed to allow both buyers and sellers to assess the risks and opportunities of any given deal before finalising it.
In this article, we focus on the importance of financial, tax, and commercial due diligence, key considerations, and best practices for both buyers and sellers. While our expertise lies in these areas, we also work closely with trusted partners who can assist with legal, operational, and IT due diligence to provide a service you’ll be keen to make the most of.
What is due diligence?
Due diligence is the process of investigating and evaluating a business before entering into a transaction. It involves a thorough review of financial, operational, legal, and strategic aspects, to ensure that all risks are identified and mitigated.
For buyers, due diligence helps confirm that the business is worth the investment. For sellers, meanwhile, it provides an opportunity to address any issues in advance and ensure a smooth transaction. It really is win-win for both parties, like it was for a recent client of ours.
Our client, a private investor, was considering the acquisition of a family-run business in the retail sector. While the business demonstrated strong performance, our comprehensive due diligence revealed several concerns that could have significant consequences for future owners.
- VAT misstatements
During our review, we noticed discrepancies in the company’s VAT returns. Errors made by their accountants had resulted in underreported VAT liabilities over multiple quarters. This posed a risk of potential HMRC penalties and interest charges post acquisition. We worked with the sellers to correct the VAT errors and notify HMRC prior to completion.
- Personal expenses recorded as business costs
We identified several personal expenses, including family holiday costs and non-business related purchases, incorrectly recorded as business costs. This artificially reduced reported profits, leading to an understated corporation tax liability. Personal expenses were reclassified, providing a more accurate representation of the company’s profitability.
We used our findings to advise on the warranties and indemnities in the SPA to protect our client from potential historic tax exposures. The adjusted financials ensured a fairer valuation and protected the buyer from potential post-deal liabilities, giving them confidence in their investment.
Financial, Tax, and Commercial Due Diligence: Let’s take a closer look…
Financial due diligence involves:
- Reviewing historical financial statements and tax returns
- Assessing revenue trends, profitability, and sustainability
- Identifying any outstanding liabilities or hidden financial risks
- Analysing cash flow and working capital requirements
- Evaluating the accuracy of financial projections and budgets
- Understanding debt structures and credit agreements.
- Reviewing tax compliance history and identifying potential risks
- Assessing VAT, corporation tax, and payroll tax liabilities
- Identifying any outstanding tax disputes or HMRC investigations
- Analysing tax-efficient structuring options for the transaction
- Understanding the impact of capital allowances and R&D tax credits.
Commercial due diligence involves:
- Evaluating the company’s market position and competitive landscape
- Assessing customer concentration and key client relationships
- Understanding revenue drivers and sales pipeline sustainability
- Identifying industry trends and regulatory changes that may impact growth
- Analysing brand perception and reputation risks.
Due Diligence Considerations: A Few More Things to Think About
Financial, tax, and commercial due diligence are critical components of an M&A transaction, but other areas also require attention too. To make your working life easier, we collaborate closely with trusted partners who specialise in:
- Legal Due Diligence, such as company structure, contracts, litigation, and regulatory compliance.
- Operational Due Diligence, including business processes, supplier contracts, and employee matters.
- IT and Cybersecurity Due Diligence, involving technology assets, data protection, and cybersecurity risks.
Best Practices for Buyers and Sellers
For Buyers:
- Start Early: Begin financial, tax, and commercial due diligence as soon as possible to identify potential risks.
- Engage Experts: Work with accountants and industry specialists to ensure a thorough review.
- Request Comprehensive Information: Ensure full access to financial records, tax filings, and market data.
- Identify Deal Breakers: Look for any financial irregularities, tax liabilities, or commercial risks that could impact valuation.
- Negotiate Based on Findings: Use due diligence insights to refine deal terms and mitigate risks.
For Sellers:
- Prepare in Advance: Organise financial records, tax filings, and commercial reports.
- Conduct Internal Due Diligence: Identify and address any financial, tax, or market-related issues before buyers find them.
- Be Transparent: Provide clear and accurate information to build trust and speed up the process.
- Optimise Tax Efficiency: Consider structuring the deal in a tax-efficient manner.
- Engage Professional Advisors: Work with accountants and industry experts to ensure a smooth process.
Keen to get started? We assist clients throughout the entire M&A process, from initial strategy and deal structuring to negotiation, execution, and post-deal integration. Our expertise ensures that you’ll achieve the best possible outcome with a seamless transaction process.
Asha Moore, Corporate Finance Associate at Arnold Hill & Co, says: “Due diligence isn’t just about ticking boxes — it’s about uncovering the hidden details that could make or break a deal. The right insights can protect your investment, ensure compliance, and give you the confidence to move forward with clarity.”
If you're considering an acquisition or preparing for a sale, Asha is here to guide you through every stage of the deal. Get in touch with Asha today to discuss your M&A journey and help tick another big item off your to-do list!
Author, Asha Moore - Corporate Finance Associate
