Acquisition Due Diligence: Checklist Before Buying a Company

Quick answer. Acquisition due diligence is the methodical review of a target company before its purchase, covering accounting, tax, employment and legal areas. It pursues three goals: confirm the value, detect hidden liabilities, and calibrate the representations and warranties. Allow two to six weeks between the letter of intent and the closing.

Buying a company is not buying a balance sheet. It means taking over a history: contracts, latent disputes, tax and social filings, off-balance-sheet commitments. In the acquisition files we support, the bad surprises almost never come from the reported revenue. They come from what the seller did not disclose: an ongoing URSSAF audit, a non-renewable commercial lease, a missing litigation provision, a shareholder loan to repay.

Acquisition due diligence does exactly that: it turns an act of faith into a documented decision. This article offers an operational checklist, area by area, and explains how the audit concretely feeds price negotiation and the drafting of the representations and warranties. It complements our full M&A due diligence methodology, which focuses on the overall approach.

Acquisition due diligence is an adversarial review of the information provided by the seller. It is not a certification of the accounts in the statutory audit sense: it is a contractual engagement, scaled to the buyer's risk and budget, whose deliverable is a report identifying risk areas and their potential financial impact.

Two misunderstandings recur. First: believing that certified accounts make an audit unnecessary. Certification attests to the regularity and fairness of the accounts at a given date; it says nothing about future commitments, emerging disputes or the real quality of the order book. Second: thinking due diligence boils down to numbers. The legal and employment areas often weigh as much as the accounting area in the final price.

Our reading#

The real output of acquisition due diligence is not the report. It is the negotiating power it gives. Every quantified risk becomes either a price reduction, a warranty clause, or a condition precedent. A buyer who arrives at the table without due diligence negotiates blind; a buyer who arrives with a documented list of risks negotiates with arguments. That is why we always connect the firm's acquisition due diligence engagement with the valuation of the target before negotiation.

Accounting area#

The goal is to verify that the accounts reflect economic reality and that no result has been embellished before the sale.

• Consistency of the last three balance sheets and income statements, with analysis of abnormal variations
• Reality and age of trade receivables: aged balance, doubtful debts, recorded or missing impairments
• Valuation and turnover of inventory: obsolete stock, valuation method, impairments
• Detail of fixed assets: physical existence, condition, depreciation, latent gains
• Provisions: are they sufficient for known risks (disputes, warranties, restructuring)
• Off-balance-sheet commitments: guarantees, finance leases, pension commitments, pledges
• Shareholder loan account: amount, repayment terms, treatment planned at closing
• Normative cash: does the target need cash to operate, or can cash be extracted

Tax area#

Tax risk is the most dangerous because it outlives the sale. When you buy the shares of a company, you also buy its tax past.

• Tax returns for the last three years and reconciliation with the accounts
• VAT returns: consistency with revenue, VAT credits, adjustments
• Past, ongoing or notified tax audits; rectification proposals
• Carried-forward losses: amount, conditions for retention after a change of control
• Special regimes applied (research tax credit, zoned exemptions) and risk of challenge
• Joint payment liability of the buyer for certain taxes (see below)
• Registration duties due on the deal, depending on whether you buy shares or a business

Employment and payroll area#

• Employment contracts: sensitive clauses (non-compete, day-rate, seniority, acquired benefits)
• Compliance of payslips and social contributions; DSN audit
• Applicable collective agreements and reclassification risk
• Past or ongoing labour-court litigation
• URSSAF audits: past, ongoing, observations left unaddressed
• Deferred commitments: profit-sharing, incentive schemes, retirement indemnities
• Key people: dependence of the business on one or two individuals, retention clauses

Legal area#

• Up-to-date articles of association, shareholders' agreements, approval and pre-emption clauses
• Title to strategic assets: trademarks, patents, domain names, software
• Commercial leases: remaining term, renewal terms, assignment clause
• Major customer and supplier contracts: change-of-control clauses
• Ongoing disputes and unprovisioned litigation risks
• Sector-specific regulatory compliance (licences, authorisations, GDPR)
• Insurance: policies in force, reported claims, exclusions

Buying a business does not shield you from the seller's tax past. Article 1684 of the French Tax Code (CGI) creates a joint payment liability of the buyer of a business with the seller for income tax or corporate tax due on profits earned during the last year, and for certain other taxes linked to the transferred operation.

The duration of this liability is in principle 90 days. This period can be reduced to 30 days when three cumulative conditions are met, as set out in the text in force:

1. the notice of transfer was sent to the tax authorities under the conditions of the second paragraph of point 1 of article 201 of the CGI;
2. the seller filed the results return referred to in points 3 and 3 bis of article 201 within the period set by that same article;
3. on the last day of the month preceding the sale or transfer of the business, the seller is up to date with their declaration and payment obligations in tax matters.

If any of these conditions is missing, the period remains 90 days.

Documentary watch point. Part of the administrative doctrine (BOFiP BOI-REC-SOLID-20-30, in an earlier version) still refers to a single period of three months and does not reflect the reform that introduced the reduced 30-day period. In practice, we rely on the text in force of article 1684 of the CGI, not on that peripheral doctrine: its wording has changed, and it is the law that sets the actual conditions.

What this changes in practice#

The escrow of the price with the notary or lawyer is sized on this liability period. For a buyer, ensuring that the three conditions for the reduction to 30 days are met means releasing the price faster and shortening the escrow lock-up. This requires demanding from the seller, from the negotiation onward, proof of the filing of the notice of transfer and of the results return, and evidence of an up-to-date tax position.

The purchase route directly affects registration duties. It is one of the first trade-offs to settle with the buyer.

Sale of a business (fonds de commerce). Article 719 of the CGI sets a progressive budgetary duty across four brackets on the sale price (after a 23,000 euro allowance):

Added to this budgetary duty are a departmental additional tax (0.60%) and a communal additional tax (0.40%). In practice, the global all-taxes-included rate generally used is about 3% on the 23,000 to 200,000 euro bracket and 5% above 200,000 euros. Note: these 3% and 5% rates are the global rates, not the rates of article 719 itself, and the internal 107,000 euro threshold does exist in the budgetary duty.

Sale of shares. The duties depend on the corporate form and the nature of the company (in particular whether it is real-estate-heavy). The trade-off between a share deal and an asset deal does not turn solely on registration duties anyway: it also engages the fate of carried-forward losses, the assumption of the tax and social past, and the exact scope transferred.

Should the audit be entrusted to the buyer's firm, or should you rely on the target's already-reviewed accounts? Our rule: the auditor must work in the buyer's interest, not the seller's. Accounts provided by the seller are a starting point, never a conclusion. For a structural acquisition, the audit investment (often a modest fraction of the price) pays for itself as soon as it reveals a single undisclosed liability or justifies a price reduction.

That does not mean auditing everything in depth. On a small deal, we focus the effort on the three or four most likely risk areas given the sector. This is the subject of an upfront scoping with the buyer, in line with the goal of structuring your external growth.

Even a thorough audit does not see everything: some risks only materialise after the purchase (a tax reassessment notified a year later, a dispute that resurfaces). The representations and warranties (garantie d'actif et de passif, GAP) is the clause by which the seller undertakes to indemnify the buyer if a liability predating the sale appears after closing, or if a declared asset turns out to be overvalued.

A solid GAP rests on a few parameters to negotiate:

• Duration: often aligned with the tax and social limitation periods
• Cap: maximum amount guaranteed, sometimes expressed as a percentage of the price
• Trigger threshold (deductible and de minimis): below it, no indemnification
• Guarantee of the guarantee: escrow, bank guarantee or earn-out clause, to ensure the seller is solvent the day the warranty is called

The link between audit and GAP is direct: what the audit identified as a latent risk must be covered by name in the warranty; what it quantified as a certain liability must instead come out of the price before signing.

1. Scoping and letter of intent. The audit scope, schedule and priority risk areas are defined. This is also the moment to review the 20 financial points to check before the letter of intent.
2. Opening the data room. The seller makes the documents available: accounts, tax returns, contracts, payroll, litigation. A thin data room is itself a signal.
3. Audit work by area. Accounting, tax, employment, legal, in parallel or in sequence depending on budget.
4. Report and list of points. Each risk is qualified (certain, probable, latent) and quantified where possible.
5. Negotiation. The points translate into price reductions, warranty clauses or conditions precedent.
6. Closing. Signature of the deeds, setting up of the escrow and the GAP.

In SME acquisition files, the most common blocker is not a spectacular liability: it is a shareholder loan account that no one had clearly quantified, or a commercial lease whose assignment clause requires the landlord's consent. These two points, easy to check upstream, cost weeks when discovered on the eve of the closing. This is exactly the kind of friction that a targeted audit eliminates early.

• Acquisition due diligence turns a purchase into a documented decision: it confirms value, detects hidden liabilities and calibrates the warranty.
• Tax and social risk survives the sale when you buy shares: it deserves as much attention as the accounting area.
• Buyer's tax liability on a business (art. 1684 CGI): 90 days, reducible to 30 days under three precise cumulative conditions tied to the notice of transfer and the seller's tax position.
• Registration duties on a business (art. 719 CGI): four-bracket budgetary duty (0% / 2% / 0.60% / 2.60%); global all-taxes-included rate of about 3% then 5%.
• Every detected risk has a treatment: price reduction, warranty clause, condition precedent or escrow.
• Representations and warranties cover what the audit could not quantify: negotiate duration, cap, threshold and guarantee of the guarantee.