What is due diligence, and what is it for?
The purpose of due diligence is to reduce investor risk and to reveal the potential in a business before a transaction. In an acquisition or an investment, the buyer cannot simply rely on what the seller says about the company. An independent expert confirms that the financial statements are reliable and that there are no hidden risks.
During the review we identify the key risks and the factors that could break the deal. Our service is financial and tax due diligence, in other words the reality behind the numbers and the tax position. Legal due diligence is carried out by our partner law firm, and we can coordinate all three workstreams.
Who uses it, and in what situation?
Due diligence is usually commissioned by a party to a transaction, but not only by large players, and not only by buyers:
- International buyers acquiring a Hungarian company. A foreign buyer does not know the local tax and accounting environment, so it uses a Hungarian expert to assess the target’s real financial position and tax risks.
- Domestic buyers and strategic investors who want a clear picture before buying another company or a competitor.
- Venture capital and private equity investors, who have the target’s financial and tax position reviewed before investing. A significant part of our engagements comes from this group.
- Sellers preparing for a sale (vendor due diligence). The seller commissions the review to fix problems before the negotiations start and to bargain from a stronger position. This speeds up the deal and builds buyer confidence.
- Start-ups and their investors, where a large part of the company’s value, for example experimental development, does not always show up clearly in the books.
If you are not sure whether due diligence is needed in your situation, get in touch and we will help you decide.
What does due diligence examine?
Financial and tax due diligence typically looks for answers to these questions:
- Are the financial statements of the past years reliable?
- Is the target’s bookkeeping in order, and do the assets and liabilities really exist?
- Are there hidden debts or off-balance sheet obligations?
- Are the VAT, corporate income tax and other tax returns in order?
- Is there an ongoing tax audit or tax dispute?
- Are the employment contracts, the payroll and the social security matters in order?
- Is there any obligation that could cause a problem after the acquisition, or that affects the purchase price?
How the due diligence process works
The process usually consists of the following steps:
- Planning: understanding the transaction and the target, agreeing the focus areas and the documents needed.
- Review: detailed examination of the financial and tax data, on site or online.
- Status report: a summary of the findings so far.
- Discussion of the risks identified: a joint meeting with the client.
- Draft due diligence report.
- Final report.
For an urgent transaction an accelerated review is also possible. We agree that in advance.
The outcome: the red flag report
We report the results of the due diligence primarily in a red flag report. In it we point out the risks that have to be managed as part of the investment and that go beyond normal business risk. The report presents serious and minor risks separately, in order of priority, and it also shows the target where it needs to improve. Many investors expect exactly these questions to be settled before or during the deal.
On request we also prepare a short executive summary that supports a fast decision, in English or in Hungarian.
Why choose MGI-BPO for due diligence?
MGI-BPO has been dealing with the financial and tax affairs of companies for decades, and has helped businesses in many industries. You can read more about our clients here.
Due diligence here is not the work of one person. Each area of the review is handled by a colleague who is experienced in that field, so the result is accurate and well founded across the board. Our experience covers the whole of finance and accounting, which also means that once the review is done, we can help develop the business further on the basis of the findings.
Every engagement is coordinated by a dedicated partner from our audit team. Which partner it is depends on the nature of the engagement and the client. That partner is your primary contact, with the full team of specialists behind them.
You can read more about our team of specialists here.
International background: MGI Worldwide M&A
In due diligence, an international connection is a real advantage. As a member of the Global M&A Group of the MGI Worldwide network, we are not limited by borders: in a cross-border deal, expertise in the other country is available through the network’s local member firms, whether you are the buyer or the seller. This matters especially when a foreign buyer acquires a Hungarian company, or when a Hungarian company is looking for a target abroad.
How we work together
First we agree the objectives and prepare a plan with a matching timetable. From you we will mainly need the financial statements, the general ledger and sub-ledger records, the tax returns, the major contracts and the employment documents. We assign a dedicated partner to the engagement who coordinates the review and stays available to you throughout. The engagement ends with the delivery of the final due diligence report, and of the executive summary if you want one.
Frequently asked questions
Who actually does the work, a senior expert or a junior?
Due diligence is a complex, deal-critical task, so it is carried out under professional direction at partner level. We assign a named, experienced specialist to the engagement who knows the Hungarian tax and accounting rules.
Can you coordinate the financial, tax and legal due diligence together?
Yes. We carry out the financial and tax due diligence, we bring in a partner law firm for the legal review, and we can align all three workstreams, so you do not have to coordinate the experts yourself.
How long does it take, and can it be accelerated?
The time needed depends on the size of the target and the depth of the review. For an urgent transaction an accelerated review is possible; in that case we focus on the most critical risks.
How do you report the risks you find?
In a red flag report, with serious and minor risks separated by priority. On request we also provide an executive summary so that you can decide quickly.
Which documents will be needed?
Typically the financial statements, the general ledger and sub-ledger records, the tax returns, the major contracts and the employment documents, provided digitally, in a data room or through an encrypted platform. We give you the exact list at the planning stage.
In what language and format will we receive the report?
In English or in Hungarian. For international clients we provide the full communication and the report in English.
Who is liable if an analysis turns out to be wrong or incomplete?
We stand behind our own work: we have professional indemnity insurance, which is also set out in our contracts. It is important to note that due diligence is based on the data made available to us and on the agreed scope of the review, and we set that framework out in writing in advance.
How do you price the work, and what is included?
Our quote is fixed in advance, depending on the size of the target, the depth of the review and the deadline. If the scope grows during the deal or the project runs longer, we tell you before it happens.
Get in touch
If you are planning an acquisition, an investment or a sale and you want a clear financial and tax picture before you decide, contact us. We help you find the risks before they become your problem.
