Due Diligence in Today’s Worldwide Economy
Cross-border transactions are becoming more common as international connections increase. Has a proper due diligence been conducted?
June 25, 2009
There was a time when only the giant corporations would be involved in situations such as mergers and acquisitions (M&A) requiring extensive due-diligence investigation. Today, the need for due diligence is occurring on a regular basis at all levels of business enterprises. Business ventures are pooling their resources in mergers to expand or survive. Tentative alliances are formed in search of product and regional growth. Exploratory attempts to establish feasibility of a union of corporate cultures are required more commonly in this global economy.
What Is Due Diligence?
Due diligence is the investigation by an investor or its advisors of the complete character of a target business. This target might be a prospective acquisition, a joint venture, a strategic alliance partner, a prospective public offering registrant or a potential investment. A target company might also perform due diligence on a potential investor, especially if the deal involves consideration other than cash. Even in a cash transaction, nonfinancial factors should be investigated to determine factors such as corporate cultures and strategies for future compatibility.
Financial Due Diligence
Once the lawyers and consultants conduct the strategic, operational and legal due diligence, financial due diligence becomes the major focus of investigation during a due diligence transaction. Financial due diligence involves analysis of the company’s historical, current and prospective financial statements, as well as tax returns and other financial data. Review of these documents can reveal the following crucial information: trends in revenue, profits, investor returns, growth rates and profit margins; contingent liabilities; transfer pricing issues; capital structure and financing terms; and balance sheet ratios, to name some of the major issues addressed. In an international situation, reconciling financial statements to U.S. based generally accepted financial principles (GAAP) might be necessary to achieve comparability.
Tax Due Diligence
In a cross-border transaction, tax due diligence can be an extremely onerous task. Not only is federal tax an issue, there may also be provincial, territorial, value-added and goods-and-services taxes. When multistate operations are involved, the focus widens to include state, city, county and parish taxes. The taxes involved would include sales and local, income, gross receipts, business activity, capital stock, employment and withholding taxes.
A tax due diligence would investigate the following areas of concern:
These areas of investigation are only the tip of the iceberg. A complete due diligence project will investigate a vast amount of issues before concluding the feasibility of the transaction. International mergers require extensive review of the national cultures, as well as all legal and financial issues required in domestic mergers. With the shrinking of the globe, these cross-border endeavors will certainly become more commonplace.
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Mary F. Bernard, CPA, MST is a Tax Principal and Director of State and Local TaxServices at Kahn, Litwin, Renza & Co., Ltd. in Providence, RI.