Due diligence

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Due diligence
  • Introduction
  • Tax due diligence
  • The due diligence project

Introduction

A tax practitioner is most likely to become involved in due diligence in reviewing the target’s tax position on behalf of the purchaser.

The overall aim is to provide a report to management, highlighting key areas of risk and suggesting what actions could be taken by management to mitigate these risks. This process is also often required by the banks and other finance providers to give some comfort that the investment being made is sound prior to funds being advanced to the acquiring group. As part of due diligence process detailed checks will be made concerning the legal, commercial, financial and tax history of the target company or group, depending upon the requirements of the management team.

The main due diligence report usually covers:

  • analysis of the financial position
  • analysis of the forecast results
  • details of the customer base, value and terms of key contracts
  • details of the management team
  • review of costs, ie staff, premises, etc
  • review of the tax position of the companies being acquired
  • asset review, ie identification of intellectual property and details of any protection, eg patents, registered designs, etc
  • purchasing and supply chain information
  • suitability of operating and IT systems

Due diligence is usually carried out by accountants, who may be part of a specialist corporate finance transaction support team. The work will involve close liaison with other professional advisers, eg lawyers, etc involved in drafting the sale and purchase agreement and other documentation.

Depending on the type of business carried on by the target, it may be necessary for the purchasing company to engage with a specialist adviser to carry out commercial due diligence. Specialist knowledge may be required for example in relation to:

    More on Buying a company or trade: