Introduction: Buying a Company Requires More Than Checking Its Price
Buying an existing company can be an attractive alternative to establishing a new business from scratch. An existing Bulgarian company may already have a trading history, contracts, employees, assets, licenses, customers, or established relationships with suppliers. For a foreign investor, acquiring an existing business can sometimes provide a faster route into the Bulgarian market.
However, a company that looks attractive on paper may have financial or accounting issues that are not immediately visible. Outstanding liabilities, unpaid taxes, inaccurate financial records, related-party transactions, or unresolved obligations can significantly affect the value of an acquisition.
This is why financial due diligence should be an essential part of the acquisition process.
What Is Financial Due Diligence?
Financial due diligence is a structured review of a company’s financial information before an acquisition or investment.
The purpose is not simply to determine whether the company is profitable. A proper review should help the potential buyer understand the company’s actual financial position, identify potential risks, verify important information provided by the seller, and determine whether the proposed transaction makes financial sense.
For foreign investors considering a Bulgarian company, due diligence can also provide valuable insight into the company’s accounting practices and compliance history.
Review the Company’s Financial Statements
One of the first steps is reviewing the company’s financial statements and accounting records.
The buyer should examine available information concerning revenues, expenses, assets, liabilities, cash, receivables, payables, and equity. It is important to understand not only the reported figures but also what is behind them.
For example, a company may report significant receivables, but the buyer should determine whether these amounts are actually collectible. Similarly, inventory shown on the balance sheet should be reviewed to determine whether it has a realistic commercial value.
Comparing financial statements over several years can also reveal important trends. Significant changes in revenue, expenses, debt, or profitability should be investigated before the transaction is completed.
Check for Outstanding Taxes and Liabilities
Tax and other liabilities are among the most important issues to investigate before acquiring a company.
A buyer should determine whether the company has outstanding obligations toward the Bulgarian National Revenue Agency or other institutions. This may include tax liabilities, social security contributions, interest, penalties, or other amounts due.
It is also important to identify obligations that may not be immediately visible in the company’s balance sheet.
Depending on the transaction structure, certain liabilities may remain with the company after the ownership changes. Therefore, understanding the company’s history before signing the final acquisition documents is extremely important.
Examine Accounting Records and Supporting Documents
Financial statements alone do not always tell the complete story.
A professional review should, where appropriate, examine the underlying accounting documentation supporting the reported figures. This may include invoices, bank statements, contracts, payroll information, tax filings, and other relevant records.
The purpose is to establish whether the financial information is properly supported and consistent.
Missing documentation or unexplained differences between accounting records and supporting documents can be an important warning sign.
Analyze Revenue and Customer Concentration
Revenue quality is another important consideration.
A company may appear highly profitable because of a small number of major customers. If one customer represents a substantial percentage of total revenue, the buyer should understand the risks associated with losing that relationship.
The buyer should also consider whether revenues are recurring or based primarily on one-time transactions.
Reviewing contracts, customer relationships, and historical revenue trends can provide a much clearer picture of the company’s future potential.
Review Employees and Payroll Obligations
If the acquired company has employees, payroll and personnel-related obligations should also be examined.
The review may include salaries, social security contributions, employment contracts, unused leave, bonuses, and other employee-related obligations.
The buyer should understand the company’s current personnel structure and determine whether there are any unresolved employment matters that could create additional costs after the acquisition.
Identify Related-Party Transactions
Related-party transactions deserve particular attention during due diligence.
Transactions between the company and its owners, directors, shareholders, or affiliated companies may have a legitimate business purpose. However, they should be clearly identified and understood.
Loans, management fees, asset transfers, unusual payments, or outstanding balances involving related parties may affect the company’s financial position.
Understanding these relationships can also help determine whether the company will remain financially stable after the acquisition.
Consider the Company’s Assets and Inventory
The reported value of assets should be compared with their actual condition and commercial value.
This is especially important for companies holding property, vehicles, equipment, inventory, or other significant assets.
An asset recorded at a particular accounting value does not necessarily have the same market value. Buyers should therefore consider whether an independent valuation or additional verification is appropriate.
Why Professional Support Matters
Financial due diligence can become complicated when the buyer is unfamiliar with Bulgarian accounting and tax requirements.
An experienced accounting professional can help identify inconsistencies, assess financial information, review liabilities, and highlight areas requiring further investigation.
For foreign investors, professional local support can be particularly valuable because the review involves not only financial information but also an understanding of Bulgarian business practices and regulatory requirements.
How Balantrix Can Support Buyers
At Balantrix, we provide accounting and corporate services to Bulgarian and international businesses. Our experience with accounting records, tax compliance, company structures, and corporate procedures allows us to support clients who are evaluating an existing Bulgarian company.
Depending on the specific transaction, our support can include reviewing accounting information, identifying potential financial concerns, assessing outstanding obligations, and helping clients understand the company’s financial position before making an important investment decision.
Conclusion: Know What You Are Buying
Buying an existing company can create significant opportunities, but it should never be based solely on the asking price or information provided by the seller.
Financial due diligence gives potential buyers a clearer understanding of what they are actually acquiring. Reviewing financial statements, tax obligations, accounting records, employees, assets, customers, and related-party transactions can reveal risks before they become expensive problems.
For investors entering the Bulgarian market, professional accounting and financial support can make the acquisition process more transparent and predictable.
The principle is simple: before buying a company, make sure you understand its numbers, its obligations, and its history.
