Due Diligence Before Acquiring a Nepali Company: What the Financials Do Not Tell You

A set of audited financial statements tells a buyer what a company's management and auditor agreed to put on paper for a given year. It does not tell a buyer what was left off, what was disputed and quietly settled outside the books, or what a tax officer is currently examining three floors up in the same building where the annual return was filed.

Prepared by Nishant Marasini and team · Position stated as at 22 September 2026

Most acquisition due diligence in Nepal is still treated as a formality performed after the price has been agreed in principle, rather than as the process that should shape the price. That ordering is backwards, and it is where buyers absorb liabilities that were never theirs to inherit.

The four tracks, and why they cannot be run separately

A proper acquisition review runs four parallel tracks — financial, tax, legal, and operational — and the value is almost entirely in where they intersect. Financial due diligence tests whether reported numbers reflect economic reality: quality of earnings, working capital normalisation, and whether reported EBITDA survives adjustment for one-off items and related-party pricing. Tax due diligence tests exposure that sits outside the balance sheet entirely — assessments in progress, positions taken that an auditor accepted but the Inland Revenue Department (IRD) has not yet reviewed. Legal due diligence covers title to assets, contract enforceability, litigation, and regulatory licenses. Operational due diligence checks whether the business the numbers describe is the business that actually exists on the ground — same machinery, same headcount, same customer relationships, not names retained on paper after the underlying trade has moved elsewhere.

A financial review performed in isolation from the other three routinely misses the liabilities that end up costing an acquirer the most, because those liabilities were never designed to show up in a balance sheet in the first place.

Where the gaps actually sit

Related-party transactions that were never disclosed as such

Nepali private companies, particularly family-promoted ones, frequently transact with entities controlled by the same promoters — a transport company owned by a director's brother, a property leased from the promoter's spouse, raw material sourced through a trading firm the family also owns. Where these arrangements are priced at market rates and properly disclosed, they are unremarkable. The problem is when they are not: margin quietly extracted through an intermediary before the target's own books ever see the transaction, rent or service charges set well above or below market to move profit between entities for tax reasons, or loans between group companies that never appear as related-party balances because they were recorded as ordinary trade payables. A buyer acquiring the target company alone, without visibility into the full group structure, can end up buying a business whose reported margins depend on a related-party arrangement that evaporates the day the promoter's other companies are no longer under common control. The audited financials will show a margin. They will not show that the margin was contingent on a relationship that ends at closing.

Contingent liabilities from unresolved IRD positions

This is the single largest source of post-acquisition surprise in Nepal. A company can carry a completely clean set of audited financial statements while an IRD assessment for an earlier fiscal year is still open — under review at the Inland Revenue Office, under appeal before the Revenue Tribunal, or sitting at the Large Taxpayers Office awaiting a reassessment that has not yet been formally issued. Because Nepali audited financials generally reflect positions as filed rather than positions as ultimately assessed, a disputed VAT input claim, a disallowed expense from an earlier year, or a transfer pricing adjustment on intra-group transactions can surface eighteen months after closing as a demand notice addressed to the company the buyer now owns. Tax due diligence has to go beyond reading the notes to the accounts — it means requesting copies of every assessment order, appeal filing, and correspondence with IRD for the open years, and independently confirming with the company's tax counsel or auditor whether any position taken is aggressive enough to invite reassessment. A clean audit opinion is not evidence that a tax position will survive scrutiny; it is evidence that the auditor accepted management's representation at the time.

Informal and undocumented liabilities

Unpaid statutory dues are the most common version of this: Provident Fund and Social Security Fund contributions that are deducted from payroll but deposited late or irregularly, gratuity provisions calculated on outdated salary bases rather than current entitlement, or bonus liabilities under the Bonus Act that have accrued but not been paid out for a prior fiscal year still open at the Labour Office. The second version is disputed or informally settled employee claims — a terminated employee who has filed or threatened a claim that management considers resolved through an informal understanding, which carries no weight if that employee later pursues it through the Labour Court. Neither category shows up reliably in financial statements because Nepali SME accounting frequently records statutory dues on a cash basis rather than as an accrued liability, so the balance sheet understates what is actually owed. The way to catch this is not to read the balance sheet more carefully — it is to independently reconcile PF and SSF deposit records against payroll registers, and to request a labour dispute status report directly from HR rather than relying on management's summary.

Inventory and asset values that were never physically tested

A stock figure in audited financials often rests on a year-end count that the auditor sample-tested, not a full physical verification, and inventory ageing in Nepali distribution and manufacturing businesses can hide substantial obsolete or slow-moving stock carried at full book value because nobody has formally written it down. Fixed assets carry a parallel risk — machinery or vehicles still on the register at depreciated book value that are no longer operational, or land and building carried at historical cost with no independent valuation performed in years. A buyer relying on the balance sheet figure without an independent physical count and a current valuation of major fixed assets is pricing the deal on numbers nobody has actually verified since the asset was acquired.

Sequencing the engagement

The order in which a due diligence engagement is run matters as much as its scope, because early findings should change what gets investigated later, not just what gets reported at the end.

It starts with a structured document request list covering audited financials for at least three years, tax returns and assessment correspondence, statutory registers, material contracts, PF/SSF deposit challans, and board minutes — sent early enough that gaps in what management can actually produce become visible before site visits are scheduled, because an inability to produce basic records is itself a finding. Management interviews follow, run separately with finance, tax, and HR personnel rather than only with the promoter, because a promoter's account of the business and the finance team's account of the same numbers frequently diverge in ways worth knowing before signing. Site visits and physical verification — inventory counts, asset inspection, and cross-checking headcount on the ground against the payroll register — should happen while the document review is still active, not as a final formality, so that discrepancies found on-site can be matched back against specific line items rather than investigated cold. Finally, red-flag escalation has to happen in real time rather than waiting for a final report: a material IRD dispute or an undisclosed related-party arrangement discovered in week two should go back to the deal team immediately, because it may change the structure of the transaction itself — an asset purchase instead of a share purchase, a larger indemnity holdback, or a price adjustment — rather than simply becoming a paragraph in a report delivered after the terms are already fixed.

The financial statements are the starting hypothesis for what the business is worth. Due diligence is the process of testing whether that hypothesis survives contact with the underlying records, the tax authority's own files, and the people actually running the operation day to day.