Due diligence is essential in any acquisition. The areas most frequently covered are:
Financial due diligence – its main role is to verify the correctness of the company's accounting and financial reporting. It focuses on whether the financial statements give a true and fair view of the target's financial position — for instance, whether assets are overstated, provisions or allowances are incorrectly recognised, and so on. It also identifies risks associated with incorrect financial reporting.
Tax due diligence — reviews whether the target company duly fulfils its obligations to the tax authority and other public institutions. Its aim is to uncover potential risks arising from non-compliance with tax or related regulations, for example incorrect determination of tax liability for individual taxes, incorrect bookkeeping, failure to comply with the arm's length principle in related-party transactions, and other shortcomings.
Legal due diligence — focuses on obtaining and evaluating information regarding the company's ownership structure, ownership stakes of partners, commercial, employment and credit relationships and other legal areas. Its aim is to identify potential legal risks, existing or threatened litigation, and estimate the costs associated with resolving them.
In practice, companies often focus only on these three core areas of due diligence, which can lead to reduced transaction efficiency due to the existence of other, less visible risks.