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Due diligence – in Poland and abroad

Łucja PADRAK
Audit Supervisor  at RSM Poland

In March, RSM Poland participated in the European conference on due diligence. The meeting with transaction advisors from across Europe allowed for the exchange of experience and views concerning methods of conducting due diligence, which are different in Poland compared to Western countries.

In Poland, investors interested in the purchase of a company, and thus those most frequently using due diligence services, are primarily entities from a given industry, looking for opportunities to increase the scope of their operations, either through the expansion of the market, acquisition of new suppliers or through vertical integration (e.g. integration of a production company into a commercial company). This area of interest translates directly into the scope of due diligence. Investors cooperating with advisors expect, above all, the confirmation of the historical information presented by the acquired entity. Strong emphasis is placed on verification of the financial data. In the scope of investors’ interest verification is made to check whether the assets recognised by the company reflect the reality, whether all the obligations have been disclosed and whether the information provided by the company is reliable and reflects the actual situation.

This is due to the fact that a majority of acquired entities are small or medium-sized companies. Their accounting is frequently limited to tax purposes. The internal control systems are not sufficiently developed, and financial reporting leaves much to be desired. Hence, investors interested in the operations and the market of such a company use due diligence services mainly to find out what is really going on in the enterprise.

This looks differently in countries where the main investors are financial entities. There, the area of interest of potential buyers usually covers large companies. Their historical data do not raise major concerns, and financial information is confirmed by the opinions of expert auditors.

In this case, the scope of due diligence services focuses on the future of the company. Historical data are treated as a fact and not subject to any further verification; they are only the base for the basic purpose for which due diligence is conducted, meaning the evaluation of the maximum financial benefits that the buyer is able to obtain in the future by purchasing the company.

A very strong emphasis is placed on the evaluation of the attainable normalized EBITDA and the working capital that enables the smooth functioning of the company. This allows the investor to assess what financial resources he will need to engage and what rate of return the he will be able to obtain from the investment made.

Different approaches to due diligence service result also from different models used to determine the purchase price of the company. In countries where share sale agreements are usually constructed based on EBITDA and the working capital, the reliable determination of the value of the company is in the interest of both the acquiring company and the acquired company. Consequently, the acquisition process takes place under partnership conditions, and during the due diligence service, cooperation is established not only with the company’s employees but also with the company’s advisors and expert auditors.

In Poland, the purchase price is frequently fixed in advance, already in the preliminary agreement. The information obtained during due diligence only serves as a bargaining chip in the final negotiations, which in turn is connected with the reluctance of the acquired company to provide information. The less they know, the stronger my position in the talks is.