Financial and tax due diligence entails a careful examination of all the taxes that is headed by a company, which is available for mergers and acquisition transaction.

It includes action towards having an understanding of the particular company’s present tax structure, condition and the threat or implications of the transactions that have been processed.

Financial and tax due diligence is done to know where problem arise from and also give both parties that involve in M&As insights to make an informed decision.

Not until recently, the need to conduct financial and tax due diligence was overlooked by the client who is about to carry out merger and acquisition transactions focusing their attention on other non-financial evaluations and the number of earnings that can be generated from the company.

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However, financial and tax due diligence has grown higher today. As the tax imposed on companies by the federal, state and local government grew more intense, the need to conduct a thorough financial and tax due diligence grew more in other to reduce the risk of making a wrong decision when undergoing a merger and acquisition deal.

Understanding Financial Tax Due Diligence; What Is Financial And Tax Due Diligence?

Tax due diligence is a detailed, thorough, analysis and examination of all the different kinds of taxes that are imposed on a particular company, business, firm or an entity.

Financial and tax due diligence is usually conducted by a buyer to dig out the potential tax details. It covers not only the income taxes that are imposed on a particular company but also, the sales and uses of taxes, payroll and employment taxes, unclaimed and abandoned property, property taxes and independent contractor vs employee classification.

Slightly different from annual income tax preparation, financial and tax due diligence is usually concerned with the missed or miscalculated item in the business.

In a situation where the particular company that financial and tax due diligence is to be conducted has a foreign or a subsidiary branch, the financial and tax due to diligence will include a review of transfer pricing and foreign tax credit issue as the case may be.

This involves reading tax returns for all types of taxes and non-taxes documents, making further enquiries from the company’s management and its tax advisor for more details.

Reading non-tax documents when conducting financial and tax due diligence include, reviewing the minutes of the corporate board meeting, cross-checking the financial records, equity compensations plans and careful checking of each term that are available in employments contracts.

All this can lead to having different kinds of potential tax complications, which can affect business or company’s ability to meet the net operating loss, carry forwards against future income, uncertain or unfriendly tax conditions and deferred compensation.

Benefits of Financial And Tax Due Diligence

The benefits of financial and tax due diligence cannot be overemphasized. In a case of tax liabilities that are not appropriately reported, non-filing exposure, inability to charge sales tax or pay use tax and payroll tax, errors can be potentially exposed through financial and tax due diligence if properly conducted.

If a buyer who is interested in M&As is not informed and find a lasting solution to all these aforementioned factors that will be detrimental to the business, it may lead to a negative impact on the expected financial return from the business.

Through financial and tax due diligence, those potential risks will be discovered, mitigated and avoided in the appropriate ways. All transactions involve representations and warranties by the seller which include the property and are free from any sort of tax-related problem.

Therefore, financial and tax due diligence is very beneficial in the purchase process as it can help curb the buyer’s risk and provide protection that is related to tax liabilities that hindered the buyer’s target.

Below are some highlighted benefits of financial and tax due diligence to buyers that are interested in M&As:

• It aid and help the buyer to make a comprehensive and informed purchasing decision.
• Financial and tax due diligence served as a source of support for the negotiation of the purchasing price, transaction files and expose potential risks that may affect the business.
• It gives shape and structure to the deal and lastly,
• Financial and tax due to diligence structure-specific transaction representation and indemnities, warranties and other agreement terms.

8 Tips For Successful Financial And Tax Due Diligence

Making mistakes when conducting financial and tax due diligence can lead to severe punishment from the government. Aside from governmental punishment, the mistake will as well dent the integrity of your business before the general public.

For instance, if the particular company is known to be a tax evader, such a tag will make it difficult for customers or even stakeholders to patronize.

Therefore, we have outlined some tips to give consideration when conducting financial and tax due diligence to be successful.

Although, understanding the best way to conduct a successful financial and tax due diligence may be complex specifically when checking the separate area of the due diligence.

While the risk is significant to figure out, unfortunately, a complete and comprehensive understanding of the process is elusive thus making it difficult to know the right tips to employ when conducting financial tax due diligence.

However, we have make a comprehensive list of tips to give utmost consideration before or when conducting financial tax due diligence before swinging into action to carry out M&A.

They are as follows:

1. Carry out a comprehensive review of the particular’s company tax audits: To do this, ensure to check the result of previous audits and inquire for the reason the audit was carried out. In a situation where the tax auditing exercise is ongoing, implore or rather ask question to know what will be the likely impact the audit result may have on the transaction after it is done. As the purchaser of the potential company, discuss the need for potential tax escrow with the target company who shall assume all liabilities associated with the tax audit.
2. Critical review of the targeted company tax return at the state and federal level of government.
   By doing this, you will be certain whether or not the tax payment is updated and that the total tax to be paid has been remitted already before proceeding with the merger and acquisition.
3. Have a good understanding of the target company’s methods of accounting.
4. Make sure that any suspended revenue or tax is being recognized and must be per with the federal or state government tax principles.
5. Ascertain that the target company’s employees are properly classified for tax.
6. Have a proper understanding of the target company’s sale services and use taxes. By doing this, you should; (I).    Develop the differences in sales and tax uses with the target company. (II).    Have an in-depth understanding of the sales and use taxes implications post transactions for the potential newly merged entity.
7. If it is a company that has a foreign branch, ensure to understand the target company's foreign tax environment.
8. If the target accounting method differs from your own, employ your method to recalculate and stimulate its return and make sure that there is no form of tax left or hangovers due to changes in accounting methods.

Conclusively

Buyers particularly should get protected from any potential risk involved in a business they had sacrificed both their time and capital on.

If all these tips are duly applied, buyers will be able to identify any potential risk and helped them to make an informed decision on either to or not go ahead to conclude the deal.