In the process of acquiring a company, making an investment, or completing a merger, due diligence is one of the most critical stages. Its purpose is to provide the buyer or investor with assurance that the company’s financial position, risks, and operations align with the information presented and that no hidden liabilities are discovered only after the transaction has been completed.

This article explains what a buyer or investor always examines during due diligence, highlights the main risk areas, and outlines how a seller can proactively prepare for the process. At the end, we also introduce vendor due diligence as an effective tool for ensuring a successful transaction.

Financial Due Diligence

Financial due diligence is usually the cornerstone of the entire process. It assesses the reliability, sustainability, and true profitability of the company’s financial data.
Typical focus areas include:

• the quality of historical financial statements;
• the structure and recurrence of revenues and expenses;
• working capital levels and seasonality;
• debt burden and financial obligations;
• cash flows and their predictability.

For investors, it is particularly important to understand whether the reported EBITDA and profit reflect a stable business model or include one‑off and non‑recurring items. Adjustments are often made, and these can significantly affect the company’s valuation.

Tax Risks

Tax due diligence focuses on whether the company has met its tax obligations and whether potential tax exposures may exist in prior periods.
Common topics reviewed include:

• corporate income tax, VAT, and payroll tax compliance;
• transfer pricing in related‑party transactions;
• use of tax incentives and exemptions;
• history of tax audits and disputes.

Even when taxes have been formally declared, incorrect treatment or insufficient documentation can result in significant future financial exposure, which will affect the transaction price or the warranties required.

Legal Risks

Legal due diligence provides an overview of the company’s legal standing and obligations. Its aim is to identify risks that may limit business operations or impact the ownership structure.
Key areas examined include:

• clarity of corporate structure and shareholdings;
• material contracts with customers, suppliers, and partners;
• employment contracts and management agreements;
• disputes, litigation, and potential claims;
• intellectual property rights.

Legal risks are not always quantitatively large, but they can be critical for the transaction—especially if they threaten the company’s core business.

Red Flags and Deal Breakers

During due diligence, various red flags often emerge—risks requiring further clarification or price adjustments. In some cases, these may become deal breakers that prevent the completion of the transaction.
Typical warning signs include:

• inaccurate or inconsistent financial information;
• recurring tax issues or inadequate documentation;
• dependence on a single customer or key individual;
• material contracts that can be easily terminated after the transaction;
• unresolved litigation or regulatory breaches.

Such findings do not necessarily end the deal, but they have a direct impact on the transaction structure, price, and contractual protections.

How Sellers Can Prepare for Due Diligence

For the seller, due diligence is not merely a passive review. A well‑prepared seller can steer the process, mitigate risks, and support a higher transaction value.
 

Recommendations for sellers:

• tidy up financial reporting and clearly explain non‑recurring items;
• identify tax risks before the buyer does;
• review all contracts and the legal structure;
• gather information in a structured data room;
• be ready to provide clear and transparent responses.

Thorough preparation accelerates the transaction process and increases buyer confidence. Vendor due diligence is an effective tool to achieve this.

What is Vendor Due Diligence (VDD)?

Vendor due diligence is a seller-initiated, independent preparatory review that enables the sale process of a company to be managed in a structured and confident manner. It involves the early assessment of the company’s financial, tax, and business position, highlighting key value drivers as well as potential risks. This allows the seller to retain control over the process, develop a fact-based equity story, and enter negotiations without unpleasant surprises. A well-prepared transaction is smoother, faster, and more reliable for both the seller and potential buyers.

Vendor due diligence helps reduce pricing risk, accelerates decision-making, and strengthens the seller’s position in negotiations, as all parties rely on the same credible and transparent information base. At the same time, it sends a clear signal to the market of professionalism and transparency, which is often decisive in attracting high-quality buyers. In today’s complex and highly competitive transaction environment, vendor due diligence is increasingly the standard for successful transactions rather than the exception.

In BDO’s practice, vendor due diligence typically comprises a combined approach, including financial vendor due diligence (FDD) focusing on historical performance, normalisations, and cash flows; tax vendor due diligence (TDD) addressing tax positions and risks; and, where relevant, legal and commercial perspectives depending on the nature of the transaction.

Conclusion and Next Steps

Due diligence is a critical stage that helps buyers and investors make informed decisions and enables sellers to maximise transaction value. Early identification and professional handling of risks form the foundation for a successful deal.

BDO provides due diligence services that help sellers identify potential issues before approaching buyers, organise information, and support a smooth transaction process.
 

If you are planning a company sale or capital raise, contact us, and we can begin preparing today.