A Guide to Financial Due Diligence for Nigerian Business Acquisitions

Buying a business in Nigeria — whether you are acquiring a competitor, investing in a supplier, or purchasing a stake in a promising venture — is one of the most significant financial decisions you will ever make. It is also one of the most risky if you do not conduct proper financial due diligence.

Financial due diligence is the process of independently verifying the financial health, performance, and risks of a business before you commit your money. It is the difference between an informed investment and an expensive gamble.

Why Due Diligence Matters in Nigeria

The Nigerian business environment presents specific challenges that make due diligence particularly important. Financial record-keeping standards vary widely. Many businesses maintain multiple sets of accounts — one for the tax authorities, one for the bank, and one that reflects actual performance. Cash transactions are common and often poorly documented. And the seller has every incentive to present the most attractive picture possible.

Without independent verification, you are relying entirely on the seller's representations. In our experience, those representations are rarely complete and frequently misleading — not always through dishonesty, but often through optimistic presentation of uncertain figures and omission of uncomfortable realities.

What Financial Due Diligence Covers

A comprehensive financial due diligence exercise typically examines several key areas. Historical financial performance is assessed over three to five years, looking beyond the headline revenue and profit figures to understand the quality and sustainability of earnings. Are revenues recurring or dependent on a few large contracts? Are profit margins genuine or inflated by deferred maintenance, understated costs, or one-off items?

The quality of assets is verified independently. Physical assets are inspected. Inventory is counted and valued. Receivables are aged and assessed for collectability. Property ownership and encumbrances are confirmed. Many Nigerian businesses carry significant assets on their books that are worth far less than their stated value — or that do not exist at all.

Liabilities and contingent liabilities receive careful examination. This includes not only recorded debts but also potential tax exposures, pending litigation, employee entitlements, and contractual obligations that the seller may not have disclosed. In Nigeria, undisclosed tax liabilities are a particularly common finding.

Common Red Flags

Certain patterns should raise immediate concerns during due diligence. Significant related-party transactions, where the business trades extensively with entities owned by the seller or their family members, often mask true profitability. Inconsistencies between bank statements and accounting records suggest that the financial statements do not reflect actual cash flows.

Rapid growth in revenue or profit immediately before the sale may indicate window-dressing. And key customer or supplier concentration creates risk that may not survive a change of ownership.

The Cost of Skipping Due Diligence

We have seen too many Nigerian investors learn this lesson the hard way. A Lagos-based entrepreneur purchases a distribution business based on the seller's management accounts showing consistent profitability, only to discover after completion that the inventory is overstated by forty percent, several major receivables are uncollectable, and there is an undisclosed FIRS assessment pending.

The cost of proper due diligence — typically between one and three percent of the transaction value — is trivial compared to the cost of discovering these issues after you have already paid.

Structuring the Process

Effective due diligence requires access to complete financial records, bank statements, tax filings, contracts, and operational data. Begin with a comprehensive information request list and insist on receiving original documents rather than summaries prepared by the seller.

Engage an experienced financial due diligence team — not your regular auditor, who may lack the investigative mindset and commercial perspective that due diligence requires. The team should include professionals with experience in forensic accounting, business valuation, and the specific industry of the target business.

The findings should inform not only your decision to proceed but also the price you are willing to pay, the representations and warranties you require in the sale agreement, and any conditions that must be satisfied before completion. Every naira spent on proper due diligence is an investment in making an informed decision.