Tax Due Diligence - Mergers and Acquisitions | Tax Consulting South Africa

CORPORATE MERGERS AND ACQUISITIONS – DUE DILIGENCE INVESTIGATIONS AND COMPLIANCE REPORTING

Looking to buy a new business, or possibly reduce supplier costs through a merger?

In today’s fast-moving global market, businesses often buy or merge with other companies to grow and stay competitive. However, before making such a big move, it’s crucial to do thorough research into the financial health of the “target company”, known as due diligence, to avoid costly mistakes.

If a company wants to focus on its core strengths, it might decide to sell part or all of its business (sell-side). On the other hand, a company looking to grow or enter a new market might consider buying another business (buy-side).

In both cases, smart businesses work with experienced professionals to conduct a deep investigation before finalising the deal. This helps uncover potential risks, hidden financial issues, or legal problems, ensuring a smooth and successful transaction. Skipping this step can open you up to potential risks, such as financial losses, legal troubles, or even a failed deal.

KEY ELEMENTS TO A DUE DILIGENCE INVESTIGATION

A comprehensive due diligence investigation will typically involve the examination of information across various aspects of a business. This will enable companies on either the sell-side or buy-side of a transaction to make informed decisions before pulling the trigger.

An investigation conducted by a seasoned professional deals team is imperative to evaluate the historic, current and future risks, propose remedial steps, and assess the compliance status of a transaction.

An often overlooked role that a due diligence investigation plays is the determination of the value of the acquisition. Where non-compliance or risks are identified through the investigation, these may materially impact valuation of the transaction or acquisition.

Corporate due diligence:
An examination of the target business’ existing corporate structure, and documentation to identify risks and ensure compliance.
- Aim: To assist with a corporate compliance and readiness review of the target business and guide the process of addressing any areas of concern.
  
  Key Areas Scrutinized: The target business’ corporate structure including shareholding composition and active directorships, governance practices, regulatory compliance with the Companies and Intellectual Property Commission (“CIPC”), including a record of the historic filing of annual returns and ultimate beneficial ownership declarations.
Financial due diligence:
Analysing the target business’ historic financial records to audit past reporting, evaluate the integrity of internal controls, and ultimately prepare an accurate and fair valuation.
- Aim: Whether conducted on the sell-side or buy-side, a key focus area is to ensure transparency and identify potential risks that may impact a fair price valuation. This process can involve the use of market data, various valuation methodologies and the identification of key value drivers to facilitate confident price negotiations.
  
  Key Areas Scrutinized: The target business’ financial records, including historic audited financial statements, management accounts, financial forecasts, debtor and creditor analyses, and market position for strategic pricing considerations.

Tax due diligence:
A tax diagnostic review involves a high-level audit of the target business’ tax records, as declared to the South African Revenue Service (SARS).
- Aim: Perform a tax diagnostic on the target business’ eFiling profile, as held with SARS, which entails that the historic to current compliance status with SARS is scrutinised.
  
  Key Areas Scrutinized: The target business’ tax returns, across all relevant tax types, the identification of administrative and understatement penalties, accruing interest, the verification of registered details, and any outstanding tax owed to SARS.
Legal due diligence:
Legal due diligence:

An inspection of the statutory, regulatory and legal compliance profile of the target business within applicable local legislative frameworks and provisions.
- Aim: Identify legal risks, liabilities, obligations, or issues that may affect a transaction.
  
  Key Areas Scrutinized:
  
  Review of existing supplier and customer agreements in force;
  
  Evaluation of active and potential litigious matters, including the possible financial and reputational risks emanating from this;
  
  Status of intellectual property assets, such as copyrights and trademarks, as well as any claims related thereto;
  
  Appraisal of competition law implications, and confirmation as to whether the transaction may qualify as a reportable transaction to the Competition Commission.