Financial Due Diligence: How to Vet a Business Before You Buy

Buying a ready-made business — or an investor buying into a share — always means acquiring more than assets and a customer base. You also take on every liability, every legal dispute and every tax “tail” the seller would rather keep out of sight. Financial due diligence is the systematic review of a company’s true condition before the deal is signed, so that you do not inherit someone else’s debts, pledges and additional tax assessments. Below is a step-by-step guide to what exactly to check, which Ukrainian state registers expose risk, and how to secure the result in the contract.

What financial due diligence is and why you need it

Due diligence gives the buyer or investor an objective picture: what the company is really worth, which risks are “baked into” it, and whether the deal price matches the actual state of affairs. Unlike a casual glance at the balance sheet, this is a cross-check — you verify every figure in the accounts against primary documents, bank statements and public registers.

The distinction matters: due diligence is a private analytical study commissioned by one party, not a court-ordered forensic examination (судова експертиза). A forensic examination is appointed under procedural rules; at the deal stage, however, the same economic specialist can carry out an independent review of the documents and, if needed, a full formal opinion.

The goal is not to kill the deal but to decide with your eyes open. Based on the findings, a buyer typically does one of three things: adjusts the price by the amount of the identified risk, demands that the problem be resolved before closing, or walks away. In my expert practice, the most expensive mistakes happen precisely when the review is reduced to a polite look at the seller’s polished presentation.

Analysing the financial statements: where to start

Start with the official financial statements for the past several years: the balance sheet, the income statement and the cash-flow statement. Trends across several periods reveal patterns that cannot be hidden inside a single “groomed” year.

Structure of assets and liabilities

Assets must be checked by substance, not by label:

• Fixed assets — do they physically exist, are they artificially revalued, are they pledged?
• Inventory — is it liquid stock, or “dead” slow-moving residue that has sat on the balance sheet for years?
• Intangible assets — does the company itself actually hold the rights to the brand, domain, software and licences?
• Receivables — are they realistically collectible?

On the liabilities side, look beyond bank loans for loans from related parties, promissory notes, guarantees and sureties issued, deferred tax liabilities and provisions. The company’s real debt often far exceeds what the “current liabilities” line shows.

Receivables and payables

Receivables are a favourite way to “paint” assets. Always check:

• the age of the debt (how many months it has been outstanding);
• concentration on one or two counterparties;
• whether the debtors are parties related to the seller;
• whether the limitation period has expired.

With payables it is the opposite — the point is not to miss overdue debts, penalties and obligations already subject to claims or court action.

Hidden debts, sureties and pledges

The most dangerous risks are the ones that are not on the balance sheet at all. The company may have acted as a property guarantor for someone else’s loan, pledged equipment or vehicles, or mortgaged its real estate. Formally it is another party’s debt — but enforcement will be directed at the very assets you just bought.

These risks are visible in public state registers:

What we check	Register	What we look for
Real-estate pledges and mortgages	State Register of Property Rights to Immovable Property	encumbrances, mortgage, ban on alienation
Pledges over vehicles, equipment, goods in circulation	State Register of Encumbrances over Movable Property (DRORM)	pledge, seizure, tax lien
Lawsuits against the company	Unified State Register of Court Decisions (YeDRSR)	claims, recoveries, insolvency cases
Debts already in enforcement	Unified Register of Debtors	open enforcement proceedings
Beneficiaries and related parties	Unified State Register of legal entities (YeDR)	ultimate owners, directors, history of changes

Run the check not only on the company itself but also on its beneficiaries and key related parties — pledges and debts are often “moved” onto them.

Tax risks: what the balance sheet does not show

Tax liabilities are a separate layer that can wipe out the entire benefit of a deal. What I look at first:

• Unagreed (contested) additional assessments. If the company is challenging a tax assessment notice (податкове повідомлення-рішення) administratively or in court — tax disputes are heard by administrative courts under the Code of Administrative Judicial Procedure (KAS) — the amount is not yet on the balance sheet, but if the company loses it will fall on the new owner. Always ask for the audit reports of the State Tax Service (DPS) and the status of any appeals.
• VAT-payer risk status. The mechanism for suspending the registration of tax invoices is set by the Tax Code and detailed in Cabinet of Ministers Resolution No. 1165. A payer may be placed on the “risky” list — notably under the so-called eighth criterion (the tax authority holding information about risky transactions). The consequence is a halt to the registration of tax invoices and, in practice, a paralysis of sales. This status must be checked separately.
• Non-real (goods-less) transactions. If the supply chains contain counterparties bearing signs of fictitiousness, the tax authority can disallow the VAT credit and the expenses. That is a direct route to additional assessments and, in some cases, to criminal proceedings for tax evasion — the pre-trial investigation of which is conducted by the Bureau of Economic Security (BEB).

Practical tip: request a certificate of no tax debt, but do not rely on it alone — it shows the position on a given date, not the hidden risks of future audits.

Court and enforcement proceedings

The target company must be checked both as a defendant and as a debtor. In the YeDRSR, look not only for closed cases but for ongoing ones: commercial disputes (under the Commercial Procedure Code, GPK), civil and labour claims (under the Civil Procedure Code, TsPK), creditors’ demands and insolvency cases. A single large case not yet reflected in provisions can change the entire economics of the deal.

In the Unified Register of Debtors, check open enforcement proceedings — these are debts already at the stage of compulsory recovery. Seizures of accounts or property mean that the assets you are buying could be encumbered as soon as tomorrow.

Beneficiaries and related parties

In the YeDR, check the ultimate beneficial owners (UBOs), the director and the history of changes in the ownership structure. This matters for two reasons.

First, you need to know whom you are really dealing with and whether the seller has the right to dispose of the share. Second, the web of related parties often explains the “odd” transactions in the accounts: selling goods to oneself at an understated price, loans from the owner, receivables owed by affiliated sole proprietors (ФОП). Such transactions both distort the financial result and create tax risk.

Separately, screen the company and its beneficiaries against sanctions lists (decisions of the National Security and Defence Council, RNBO), and bear in mind the financial-monitoring requirements on the origin of assets (the supervising body is the State Financial Monitoring Service, Derzhfinmonitoring) if there is even the slightest suspicion.

Locking the result into the contract

Finding the risks is only half the job. Lawyers do the other half by building protection into the share purchase agreement. Under the freedom-of-contract principle (Civil Code), Ukrainian M&A practice has adopted several tools:

1. Seller’s warranties. The seller states in writing that certain facts are true: no hidden debts, no litigation, no tax claims, no pledges. If a warranty proves false, that is grounds for liability.
2. Indemnities. An agreement that a specific known risk (for example, a contested assessment) is compensated by the seller if it “fires” after the deal.
3. Deferred payments and escrow. You pay part of the price not at once but after a set period, or hold it in an escrow account provided for by the Civil Code. If hidden debts surface, you cover them from that amount.
4. A price-adjustment mechanism based on the actual state of assets and debts at the closing date.

These tools only work when they rest on real findings. You cannot demand a warranty against a risk you never even asked about.

Common buyer mistakes

• Trusting management accounts instead of official ones. The seller’s “internal” figures are easy to dress up.
• Checking only the company and ignoring the beneficiaries. Debts and pledges are often held by related parties.
• Not looking beyond the balance sheet. Sureties, guarantees and contested assessments live exactly where they are “not visible”.
• Skimping on time. Due diligence under pressure to “close by Friday” is an almost guaranteed way to miss a risk.
• Not engaging an independent economist. The seller and their accountant are motivated to show the best picture, not the most honest one.

When to bring in a forensic economic expert

If the deal amounts are significant and the accounts show signs of “clean-up” — questionable related-party transactions, sharp swings in indicators, assets that do not match the real business — it makes sense to engage an economic-security specialist or a forensic economic expert. Forensic economic examination (examination of accounting and tax records, of financial and economic activity, and of financial and credit operations) is carried out under the Law of Ukraine “On Forensic Expert Examination” and the Instruction approved by Ministry of Justice Order No. 53/5.

Even outside proceedings, an independent economic study of the documents produces a reasoned conclusion about the company’s true financial condition. And if you later have to defend your interests in court, the procedural codes (GPK, TsPK, KAS) let a party to the case commission an expert opinion and submit it as evidence.

If you are planning to buy a business or take a stake and want the company checked before you sign — reach out for a consultation or an independent economic study. It is better to spend time verifying now than to spend years paying for someone else’s hidden debts.