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Due Diligence



Due diligence plays a very important role in Merger and Acquisition (M&A) transactions. It helps acquiring or investing organization understand everything possible about the target company. It is a critical step in determining whether a deal or project is worth doing. A due diligence investigation is also helpful in some other circumstances such as when a company is interested in finding out more before entering into business partnership with another company or when a manufacturer looks for an ideal OEM who can meet as many his requirements as possible.

A comprehensive due diligence normally includes legal, financial, and operational aspects, conducted separately by lawyers, accountants, and industrial experts. Financial due diligence analyzes, qualitatively and quantitatively, how the target has performed financially to get a sense of earnings on a normalized basis. Of course, it is more important to assess whether or not the target company's projections or anticipated performance is reasonable, objective, and achievable by looking at and analyzing its past.

In addition, financial due diligence analyzes the assets and liabilities to be acquired. For example, is the pricing for raw materials on par with market value? Are there finished goods in stock that are unlikely to be sold within the next three to six months? Regarding liabilities, it’s important to acquire only the liabilities that have been incurred for purchases of inventory or services that occurred prior to the closing date.

Finally, financial due diligence will look at whether taxes have been filed appropriately by the target company. Does it have any potential or hidden tax or social insurance liabilities? It’s important to ensure the target company has complied with all tax requirements.

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As accountants specializing in financial and tax areas, Russell Bedford Hua-Ander conducts financial due diligence individually or cooperatively with lawyers and other experts. In either case, we do not deem financial and tax aspects isolated. Instead, while focusing on the key financial and tax figures and issues, we consider wider scope of the target company from its strategic aspects to internal controls. Quite often, operational, organizational, and environmental considerations contribute a lot in assessing the financial and tax performance, both in the past and for the near future.

When the target company is a local growing company, we will pay special attention to those 'typical' practices and issues that often appear in such companies. Examples include hidden books and fake employees list arising from the consideration of tax and social insurance burdens.

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