The purpose of due diligence is not to produce a report. It is to put concrete items on the negotiating table. Every finding has to become one of three things: a reduction in price, a warranty or indemnity, or a reason to walk away. A finding that becomes none of them is text in a folder.
This page covers the findings that recur in Turkish targets, which years an examination actually reaches, the gaps typically found in corporate records, and how a finding is converted into a contractual term.
What a Finding Is For
Due diligence is not a compliance exercise; it is an input to negotiation. For each finding there is one question: which term of the transaction will this change?
Where a matter revealed in due diligence appears in the seller’s disclosure letter, the buyer cannot bring a claim for breach of warranty on that matter. The risk found becomes, at the moment it is disclosed, a risk the buyer has accepted.
Findings must therefore be converted into price or into a specific indemnity before the disclosure letter is negotiated. In a process where that order is reversed, everything due diligence discovers turns into a list of things the buyer has taken on.
Findings That Recur in Turkish Targets
The items below appear in almost every examination of a Turkish private company. What distinguishes this from a generic due diligence checklist is that it shows which provision produces the problem and where.
| Finding | Where it comes from | Consequence |
|---|---|---|
| Shareholder current account | A shareholder using company funds over a long period without interest | Deemed interest, disguised profit distribution, and the value added tax and withholding that follow |
| Excess cash balance | A high recorded cash balance that does not exist in fact | The same deemed interest and disguised distribution analysis |
| Reverse charge not declared | Management, consultancy and licence services received from abroad | Retrospective assessment across all open years |
| Unsubstantiated carried-forward VAT | A large receivable on the balance sheet with no supporting documentation | An asset that will be disallowed; goes to price adjustment |
| Severance provision | No provision made, or provision made short | A liability absent from the balance sheet that passes with the transaction |
| Transfer pricing file | Related-party transactions with no annual report prepared | Documentation failure and arm’s length exposure |
| Stamp duty | Undeclared contracts, letters of guarantee and progress certificates | Tax and penalty; small per document but large across a contract portfolio |
| Social security incentives | Incentives used without the conditions being met | Repayment of the incentives with late payment charges |
| Inventory count differences | Records not matching physical stock | Ex officio assessment risk and value added tax adjustment |
| Long-term construction work | Withholding applied short, or the multi-year nature of the work overlooked | Assessment and disruption of the offset timing |
The general assessment period for tax is five years from the beginning of the year following the one in which the liability arose. Due diligence is therefore run on the open years; closed years are reviewed only to show a trend.
Social security and employment claims, however, run on different periods and some are longer. An examination built on a single five-year assumption leaves a gap on the employment side.
Corporate Records: Small-Looking Gaps That Cost
The items below are not tax findings, but they affect the transaction directly and cannot be fixed at the point of sale.
- Share ledger never kept, or blank
- Share certificates never issued
- Opening and closing book certifications missing
- Electronic ledger certification files not uploaded
- No independent audit despite being within the thresholds
- Gaps in the general assembly and board resolution books
- Authority and address details not updated at the registry
- Foreign direct investment notifications not filed
Where the share ledger is blank, past transfers cannot be established as against the company. Who acquired what from whom becomes uncertain, and the chain usually cannot be reconstructed retrospectively. This is the first document requested in due diligence.
Where share certificates were never issued, the exemption available to an individual seller on a holding of more than two years is unavailable. Because the two-year period runs from issue, printing them at the point of sale changes nothing. This is the most expensive omission in Turkish private company exits and it surfaces in the tax section of the first draft agreement.
What Passes With the Transaction
The scope of due diligence is set by the form of the transaction. In a share deal the company’s history is taken as it stands; in an asset deal certain liabilities pass regardless.
Share deal
- Tax and premium debts
- Stay in the company The buyer takes it with its debts
- In a limited company, additionally
- Transferor and transferee are assessed together for pre-transfer public debts
- Employees
- Nothing changes The employer is the same company
- Permits and contracts
- Continue Subject to change of control clauses
Asset deal
- Commercial debts
- Those not listed remain behind
- Public receivables
- May attach to the business in defined circumstances
- Employees
- Pass by operation of law With service and accrued rights
- Permits and contracts
- Must be reassigned or reapplied for
The practical consequence is that an asset deal narrows the scope of commercial risk review but not of the tax, social security and employment review. Those three areas require the same depth whichever form is chosen.
Areas of Review and What Is Examined in Turkey
Quality of earnings, separation of one-off items, net debt and working capital determination, ageing of receivables and their collectability. In Turkey the review also covers whether the cash and shareholder current account balances are real, and the effect on comparability of the periods in which inflation adjustment is not applied.
Reconciliation of returns to the books, substantiation of carried-forward tax, reverse charge declarations, withholding practice, non-deductible expenses, usability of prior year losses, and any settlement, inspection or litigation files.
Severance and notice provisions, unused leave exposure, application of the minimum wage exemption, conditions attached to incentives used, subcontractor relationships and pending employment claims. The largest item missing from the balance sheet is usually here.
Share ledger and the ownership chain, the position on share certificates, book certifications and electronic ledger files, resolution books, signature authorities, currency of registry records and foreign investment notifications. Findings that block a transaction come from here.
Legal, commercial, environmental and information technology reviews run alongside these, but they are separate disciplines and outside the scope of an accountancy firm. We work with counsel and the relevant specialists in those areas and consolidate the findings into a single risk list.
The Process
- Fix the scope and the purposeWhether the review is for a share deal or an asset deal, which years are open, and what is excluded. Where the scope is not fixed in writing, the report does not answer the question the reader had.
- Issue the information request and set up the data roomReturns, books, certifications, contracts, payroll records and corporate registers. Documents that do not arrive are themselves a finding and are recorded as such.
- Run the analysis and raise questionsReconciliation of returns to books, substantiation of balances and confirmations. Questions go to management in writing; verbal answers do not enter the report.
- Management meetingsUnderstanding the operations behind the numbers and clearing the items that cannot be explained from documents. Most findings either close or harden here.
- Quantify and classify the findingsFor each finding: amount, probability and limitation period. A finding that cannot be quantified is reported as unquantifiable rather than passed over in silence.
- Report and convert into transaction termsFindings are classified as price adjustment, specific indemnity, warranty or a reason to withdraw, and translated into contractual language with counsel.
Four to eight weeks is typical for a mid-sized private company. What determines the timetable is not the analysis but how quickly documents arrive; where the data room is set up incompletely, the analysis waits for weeks.
Common Mistakes
- Reading the report and filing it. A finding that does not become price, indemnity or warranty has achieved nothing.
- Negotiating the disclosure letter before the findings. What is disclosed cannot be claimed; reverse the order and every risk found passes to the buyer.
- Lightening the tax and employment review in an asset deal. Employment relationships pass by operation of law and public receivables can attach to the business.
- Proceeding without asking for the share ledger. A blank ledger means past transfers cannot be established as against the company.
- Leaving the share certificate position to the end. It determines the seller’s tax position and cannot be corrected at the point of sale.
- Accepting the shareholder current account and cash balances as stated. Both are open to deemed interest and disguised distribution analysis.
- Assuming a single five-year limitation period. Social security and employment claims run on different periods.
- Settling for verbal answers. An explanation that does not enter the report does not exist when a dispute arises.
Frequently Asked Questions
How long does due diligence take in Turkey?
How many years does the review cover?
What findings come up most often in Turkish companies?
Why does the share ledger matter so much?
Why does a buyer care whether share certificates were issued?
Is due diligence narrower in an asset deal?
How are findings reflected in the agreement?
Does a due diligence report protect against a tax inspection?
As the Ozbek CPA team, we carry out financial and tax due diligence on transactions in Turkey — reconciling returns to the books, substantiating carried-forward tax and balance sheet items, reviewing reverse charge and withholding practice, quantifying severance and leave exposure, checking corporate records and the ownership chain, and converting findings into a price, indemnity or warranty term. We work with counsel and specialists on the legal and technical areas. See also our pages on mergers and acquisitions, business valuation and corporate restructuring. Contact us.
