Re-Transaction Audit – A Key Step to Secure Investment
In today’s business environment, mergers and acquisitions (M&A) have become an integral part of corporate growth strategies. However, each transaction carries inherent risks that can affect both the value of the investment and the operational stability of the acquired company. A critical tool for mitigating these risks is a pre-transaction review, commonly referred to as due diligence.
Failure to conduct comprehensive due diligence can have serious financial and legal consequences. Buyers may uncover unrecorded liabilities, underestimated operating costs or compliance issues that significantly reduce the value of the investment. A striking example of this occurred in 2016, when Verizon acquired Yahoo for €4.4 billion. Shortly after the deal was finalised, a major data breach was revealed, severely impacting the company’s valuation and reputation.
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The M&A Market in Central and Eastern Europe
A closer look at the M&A landscape in Central and Eastern Europe (CEE) reveals that 1,281 transactions were carried out in 2024, an increase of 8% compared to 2023. However, despite the increase in deal volume, the total deal value fell by 30.9% to €25.72 billion (Legal Business). Poland recorded 269 deals (€5.77bn), followed by Romania with 187 deals (€2.59bn) and Ukraine with 135 deals (€1.01bn) (Biznes PAP). The decline in deal value underlines the growing caution of investors and reinforces the need for thorough pre-transaction due diligence.
The Scope of Due Diligence
A pre-transaction review is an in-depth assessment of a company’s financial, legal, operational and tax position prior to acquisition. Its primary objective is to provide a complete picture of the condition of the target company and to identify potential risks that may affect the future profitability of the investment.
Types of Due Diligence:
- Financial – Examination of financial statements, cash flow, debt levels, and future obligations.
- Legal – Assessment of regulatory compliance, contractual obligations, liabilities, and ongoing legal disputes.
- Operational – Evaluation of business processes, supply chain efficiency, technology, and management quality.
- Tax – Review of tax compliance, liabilities, and potential audit risks.
- Technical – Inspection of technical infrastructure, equipment, real estate, and other physical assets.
The cost of conducting due diligence in the CEE region varies based on the audit’s scope and the size of the company:
- Basic audit (financial only): €3,500 – €15,000
- Standard due diligence (financial + legal): €11,000 – €33,000
- Comprehensive audit (full scope): €33,000 – €110,000
The Impact of Due Diligence on Investment Decisions
A careful review of the documentation helps to uncover risks such as unrecorded liabilities, liquidity issues, ambiguous contracts and employment issues. This enables investors to make informed decisions about whether to proceed, renegotiate or walk away from a transaction.
Due diligence often uncovers critical issues that affect pricing and contractual terms. For example, in the acquisition of a European technology start-up, due diligence revealed that the company had failed to secure key intellectual property rights. This allowed the buyer to renegotiate the purchase price. Conversely, a large investment firm that acquired a retail chain without thoroughly investigating supplier obligations later discovered millions of dollars of undisclosed debt, which ultimately led to bankruptcy.
Some companies deliberately conceal financial liabilities or fail to disclose ongoing legal proceedings. One notable case involved a financial institution that acquired a smaller bank, only to discover later that the entity was under investigation for money laundering.
Due Diligence: A Strategic Investment
At a time when investors are increasingly cautious, due diligence remains an indispensable safeguard against financial and legal pitfalls. Despite the increasing number of M&A transactions in the CEE region, declining transaction values highlight the growing importance of risk assessment.
While the cost of a thorough due diligence may seem significant, it pales in comparison to the potential losses associated with unforeseen liabilities, undisclosed debts or legal complications. Engaging experienced professionals to conduct a thorough due diligence process is a strategic investment that can make or break an acquisition and ensure long-term profitability.
