Serial article regarding M&A on NNA (vol.99)

This article continues the discussion on due diligence from the previous article.

Matters to be investigated in due diligence

Scope of time period, red flags type

It is common for the scope of investigation to be limited to a certain period of time in the past, for example, with regard to financial matters and minutes, as the scope of investigation would be unlimited if the scope is not narrowed down. Alternatively, buyer and the buyer’s experts may agree to carry out due diligence, so-called red flags, which is focused on investigating the existence of risk factors that require special attention. This is because it allows for efficient due diligence by focusing limited resources on the key risk factors that could be deal breakers. The red flags type is used especially in cases where budgets are limited or time is limited, as in the case of small and medium-sized deals.

Subjects of investigation

Regarding finance, taxation and legal affairs, we mainly investigate the following matters. As due diligence is a procedure that not only touches on sensitive information of the seller, but also imposes a heavy burden on the seller’s personnel, the expert carrying out the due diligence is required to investigate the necessary matters to a sufficient extent to realise the objectives of the due diligence, rather than investigating everything unnecessarily based on his or her own interests.

a. Financial due diligence

  1. Profit and loss statement
  2. Balance sheet
  3. Cash flow and business plan
  4. Liabilities and contingent liabilities which are not included in the balance sheet
  5. Related party transactions
  6. Review of discrepancies between the substance and the figures on the financial statements
  7. Review of the quality of financial information
  8. Fair value assessment of assets and liabilities when transitioning to IFRS

b. Tax due diligence

  1. Income tax (corporate tax)
  2. Sales tax (SST, consumption tax in Japan)
  3. Transfer pricing taxation
  4. Withholding income tax

c. Legal due diligence

  1. Organisation, shares
  2. Governance
  3. Contracts
  4. Assets, liabilities
  5. Labour
  6. Licenses, compliance
  7. Litigations, disputes

These are just general examples, and the focus will vary depending on the business of the target company. Due diligence will be carried out with a clear focus on the subject of the investigation.

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