Financial due diligence before an acquisition is more than checking the numbers. It answers the buyer's central question: what am I actually buying? A profitable, manageable business, or an asset that carries liabilities, tax exposures and inaccurate reporting that do not show on the surface? The price is always negotiable, but the case for it should rest on verified facts.

When you buy a company, you acquire more than property, a customer base or a brand. You also take on its past financial decisions: unpaid taxes, unresolved disputes, misstated revenue and weak controls. That is why financial due diligence should start before the price is finally agreed and the share purchase agreement (SPA) is signed.

Why Due Diligence Shapes the Terms of the Deal

The financial statements presented during a sale give a general picture of the company, but a buyer needs a more detailed assessment. Growing revenue does not by itself mean stable cash flow: sales may rest on one-off contracts, related-party transactions or unconfirmed receivables.

The task is to establish how far the reported results reflect the economic reality of the business. The goal is not to turn every gap into a reason to walk away. It is to quantify risk and reflect it fairly in the price, the warranties or the post-deal plan:

▪        if profitability is lower than management accounts suggest, the buyer revisits the price;

▪        if a specific tax liability is identified, the parties can agree an escrow, a seller indemnity or settlement of the liability before closing;

▪        if net debt or working capital differs from expectations, the price is adjusted to the actual balance sheet at closing.

In this way, financial analysis moves the negotiation from assumption to evidence.

Share Deal or Asset Deal: What Changes in Georgia

The scope of the review depends on the company's size, sector, deal structure and risk profile. The structure has the biggest impact.

In a share deal, the company passes to the new owner with its full history, including its tax history. In Georgia, the general statute of limitations for tax is three years. If the company has elected the ten-year loss carry-forward, it extends to eleven years. The Revenue Service can therefore audit earlier years, and any assessment lands on the company under its new owner. Tax due diligence before a share purchase should cover exactly that window.

In an asset deal, the buyer does not automatically assume all historical liabilities, but the risk does not disappear entirely. You need to check whether the assets are subject to seizure, a tax lien or a lease, and how employees and contracts will be transferred. VAT treatment also differs: a transfer of shares is a VAT-exempt financial transaction (without the right to deduct input VAT), while under the Tax Code the transfer of all of a taxable person's assets to another taxable person is not treated as a supply of goods. The conditions must be met precisely; otherwise 18% VAT applies.

Key Areas of Financial Due Diligence

Reporting Accuracy and Quality of Earnings

The first area is the reliability of the financial statements. Specialists reconcile management accounts with the accounting records, bank statements, contracts, and the VAT invoices and waybills issued on rs.ge. The key question is whether revenue is recognised in the right period and matches goods actually delivered or services actually performed.

Public sources help too. Companies' annual financial statements are published on reportal.ge, the portal of the Service for Accounting, Reporting and Auditing Supervision (SARAS), and public interest entities and Category I-II enterprises are subject to mandatory audit. If the figures in a sale presentation do not match the published statements, the difference should be explained in writing.

A quality of earnings review separates recurring, predictable sales from one-off transactions. Heavy reliance on a single large customer lifts revenue but creates concentration risk. The review also produces a normalised EBITDA, removing non-recurring items and adjusting for the owner's personal expenses.

In Georgia this step has tax consequences as well. Under the Estonian model, the 15% profit tax applies not only to dividends but also to deemed distributions. These include expenses unrelated to economic activity or undocumented, free-of-charge supplies, and transactions with related parties at non-market prices. An owner's personal expenses paid by the company may be treated as exactly such a distribution. Normalisation may increase EBITDA, but it can also reveal a tax liability.

Cash Flow and Working Capital

Profit and cash are not the same. A company can report a positive operating profit yet take a long time to collect from customers or tie up too much cash in inventory. In that case, the buyer may need extra funding after closing.

The review analyses receivables ageing, inventory turnover, payables and seasonality (agriculture, tourism, construction). The VAT effect is assessed separately: the liability arises on supply, while customers often pay in 60-90 days. A normal level of working capital should then be agreed. If the seller aggressively runs down inventory or delays supplier payments before the deal, a seemingly attractive price can turn into an unplanned cash need for the buyer.

Debt, Liabilities and Contingent Risks

The loan on the balance sheet is only part of the picture. A net debt calculation also counts leases, guarantees given, related-party loans, overdue tax and late-payment interest, declared but unpaid dividends and provisions for litigation. US dollar loans are common in the Georgian market, and their lari equivalent moves with the exchange rate; the price formula should account for this upfront.

An extract from the National Agency of Public Registry is a useful starting point. It shows any seizure or prohibition, tax lien or mortgage, pledges and leases over movable property, and information from the debtors' registry. Comparing this data with the balance sheet quickly shows whether all liabilities appear in the accounts.

Related-party transactions need particular attention. If the company rents premises from the owner at a non-market rate, or borrows from the owner on non-standard terms, the financial results will change after the deal. The buyer needs to know which arrangements will continue and which will require new, market-based terms.

Tax Compliance

Tax review is central to financial due diligence. Inconsistencies between tax returns, financial statements and primary documents can lead to additional assessments, penalties and late-payment interest. The review covers:

▪        VAT reporting and the match between VAT invoices and rs.ge data, including reverse-charge VAT on services from non-residents;

▪        personal income tax and pension contributions on payroll, and the status of people engaged formally under "service contracts";

▪        profit tax under the Estonian model, including deemed distribution risk;

▪        international controlled transactions and transfer pricing documentation, where the company deals with foreign related parties;

▪        ongoing or expected tax audits and disputes.

The aim is not only to find past breaches. It is equally important to assess how sustainable the company's tax model will be under new ownership, especially when the buyer is a foreign group and the operating structure is about to change.

A Regulatory Step That Is Often Missed

In larger deals, due diligence should also cover competition law. A concentration must be notified in advance to the Georgian Competition and Consumer Agency if the parties' combined turnover in Georgia exceeded GEL 20 million in the previous financial year and at least two parties each had turnover above GEL 5 million. The review fee is GEL 5,000, and a concentration completed without notification is subject to fines. The thresholds should therefore be checked during the revenue analysis and reflected in the conditions precedent.

Documents That Build a Reliable Picture

The quality of the review depends on the data available. A typical starting package includes:

▪        financial statements for the last three years and, where available, the auditor's report;

▪        the general ledger, trial balance and bank statements;

▪        tax returns, an extract from the company's rs.ge account and any tax audit reports;

▪        loan, lease, rental and key commercial contracts;

▪        detailed aged listings of receivables and payables, and inventory data;

▪        payroll records, a capital expenditure register and management forecasts;

▪        an extract from the Public Registry and the company's charter.

Collecting documents is not enough: they must be cross-checked and exceptions explained. Forecasts deserve particular caution. They are useful only when the assumptions, sales pipeline and operating capacity are properly supported.

A lack of documentation does not always indicate fraud. In small and owner-managed Georgian companies, accounting is often less formalised, and Category III-IV enterprises are not subject to mandatory audit. Even so, insufficient documentation is a risk indicator in itself, because it prevents independent confirmation of liabilities and results. Sometimes an accounting recovery is needed before the acquisition can proceed.

How Buyers Should Use the Findings

A due diligence report should not end as a list of risks. Its value lies in turning findings into specific decisions:

▪        Price adjustment: normalised EBITDA, net debt and the working capital target;

▪        Price mechanism: a locked box or a completion accounts adjustment;

▪        Protections: escrow, deferred consideration, seller warranties and indemnities, particularly for the tax limitation period;

▪        Conditions precedent: repayment of debt, renegotiation of related-party contracts, competition clearance;

▪        Integration plan: smaller issues go into the first 100-day action plan.

The buyer should distinguish a fixable problem from a structural weakness. A slow month-end close can be fixed with the right accounting process. But if profit consistently depends on one customer, unfunded receivables or unstable discounting, that is a business model issue, not just an accounting gap.

Combining independent audit, tax and advisory perspectives at this stage creates a practical advantage. AGIC's multidisciplinary team helps buyers assess reporting accuracy, tax positions and the financial data that matters for the deal price within a single, consistent context.

Frequently Asked Questions

What is the difference between financial and tax due diligence?

Financial due diligence assesses quality of earnings, normalised profit, net debt and working capital. Tax due diligence checks whether taxes were correctly declared and paid, and what liabilities the company may face in future. In practice they are carried out together, because a finding in one often affects the other.

How many years should the review cover?

Usually the last three financial years plus the current period, which matches Georgia's general tax statute of limitations. If the company has elected the ten-year loss carry-forward, the tax review may need to cover a longer period.

How long does financial due diligence take?

For a small or medium-sized company, typically three to six weeks, provided data is supplied promptly. It takes longer when the accounting records are disorganised or the company operates in several jurisdictions.

Does buying a small business need due diligence?

Yes. Small companies are often not subject to mandatory audit, so an independent review is the only way to find out how reliable the numbers are. The scope can be scaled to the size of the deal.

Conclusion

Well-executed due diligence does not guarantee a successful deal. It delivers something more important: the buyer makes the decision knowing that the price, the terms and the post-deal plan reflect the company's real financial position.

Since 2007, AGIC has served Georgian and international companies across audit, accounting, tax and advisory. In pre-acquisition due diligence, that means the numbers, the tax position and the contract terms are tested together.

 Planning to acquire a company or a stake in one? Contact us to agree the scope of financial and tax due diligence - agic.ge

This article is general in nature and does not constitute specific tax or legal advice. Information is current as of November 2026.