Financial due diligence in the Czech Republic: How to uncover hidden risks in the accounts

Official financial statements, freely available in the Commercial Register (Obchodní rejstřík), often fail to reflect the true economic reality of a business. Without an in-depth review, the buyer risks inheriting hidden debts, unsellable inventory, or historical tax errors.

The solution is an independent financial and tax review, known as due diligence. This process uncovers the real value of the business, identifies financial threats, and gives you strong arguments for negotiating the final purchase price.

What needs to be reviewed?

When performing financial due diligence, there are three main pillars that most affect future cash flow:

1. Analysis of receivables structure and quality: Check the creditworthiness of existing debtors and analyze overdue receivables. These often include bad debts that will need to be written off, which directly reduces the real value of the company.
2. Valuation and actual state of inventory: Have unsellable inventory checked, along with the accuracy of its valuation in the accounts. Verify whether the physical stock on hand matches the records.
3. Liabilities to third parties and the state: Review bank loans, leasing agreements, overdue invoices, and the existence of out-of-court disputes or future financial obligations such as guarantees.

Legal due diligence only makes sense alongside a financial audit

Many investors rely solely on legal due diligence. A lawyer will check the validity of contracts, licenses, and founding documents, but will not determine whether a business partner is solvent or whether the invoiced price is economically justifiable.

Financial due diligence looks back at filed corporate income tax and VAT returns. It uncovers methodical accounting errors that the tax authority could later assess against the new owner.

What to watch out for

In 2026, we need to focus on specific risks brought about by digitalization and new legislation in Czechia:

1. Transfer pricing: If the target company traded with parties connected by ownership or personnel, we check whether prices were set at market level.
2. Payroll liabilities: An often-overlooked risk is unused employee leave carried over from previous years, or hidden liabilities arising from agreements (DPP and DPČ) following recent legislative changes. These items represent an immediate financial cost after taking over the company.
3. Intangible assets and software: We verify whether developed software or purchased licenses are correctly capitalized as assets, and whether the company holds provable copyright to them.

Buying a company without a financial review is a gamble with your own capital. At CATO, we have specialized in due diligence processes since 1996. Our team of experienced accountants and tax advisors will carry out a precise analysis that gives you certainty in the transaction.

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