Acquiring an Israeli company can be an attractive opportunity. Israel has a strong technology ecosystem, experienced talent, innovative products, and companies with customers around the world.
But behind the impressive growth numbers, there can be a very different story.
A company may report strong revenue while carrying significant deferred revenue. It may have healthy cash reserves but also hidden tax liabilities. It may appear profitable while relying heavily on one customer or a small group of key employees.
That’s why financial due diligence is one of the most important steps before acquiring an Israeli company.
The goal isn’t simply to verify the numbers. It’s to understand what you’re actually buying, identify risks before they become expensive surprises, and determine whether the proposed valuation makes sense.
What is financial due diligence?
Financial due diligence is a detailed review of a target company’s financial position, performance, cash flow, liabilities, and underlying business model before an acquisition.
It typically looks beyond the company’s standard financial statements.
The buyer wants to answer questions such as:
- Are the reported revenues sustainable?
- Are the company’s profits real and recurring?
- How much cash does the business actually generate?
- Are there hidden liabilities?
- Are taxes fully paid and properly reported?
- Are customer contracts structured as presented?
- Is working capital sufficient?
- Are financial projections realistic?
- What costs will change after the acquisition?
In Israel, this process may also involve reviewing local tax filings, employee-related obligations, government programs, and the company’s corporate and financial records.
For example, Israeli companies above certain turnover thresholds are required to submit detailed financial information to the Israel Tax Authority through Form 6111, including profit and loss, tax adjustments, and balance-sheet information.
1. Start with the financial statements
The first step is to understand the company’s financial history.
A buyer will typically review several years of:
- Income statements
- Balance sheets
- Cash-flow statements
- Management accounts
- Trial balances
- Bank statements
- Budgets and forecasts
- Accounts receivable
- Accounts payable
Don’t just look at the headline numbers.
Look for trends.
Is revenue growing consistently? Are gross margins improving or declining? Is operating expenditure rising faster than revenue? Is the company actually generating cash?
A single profitable year doesn’t necessarily mean the business is financially healthy.
2. Verify the quality of revenue
Revenue is often the star of an acquisition presentation.
It shouldn’t be accepted at face value.
The buyer should analyze revenue by:
- Customer
- Product
- Geography
- Contract type
- Recurring vs. non-recurring revenue
- New vs. existing customers
- Monthly and annual contracts
This helps determine whether reported growth is sustainable.
For a SaaS company, for example, it is important to compare accounting revenue with ARR, MRR, bookings, churn, renewals, and deferred revenue.
A company showing 40% revenue growth may look very different if most of that growth came from a single one-off contract.
3. Investigate customer concentration
One of the biggest financial risks in an acquisition can be hidden in the customer list.
Imagine that a company generates $10 million in annual revenue.
That sounds impressive.
But what if $4 million comes from one customer?
Suddenly, the risk profile changes.
The buyer should identify:
- Top customers by revenue
- Percentage of revenue from the top 5 and 10 customers
- Customer churn
- Renewal rates
- Contract duration
- Pricing changes
- Outstanding receivables
- Dependence on individual customers
Customer concentration doesn’t automatically make an acquisition unattractive. But it should be reflected in the valuation and risk assessment.
4. Review accounts receivable
Revenue on paper isn’t the same as cash in the bank.
Accounts receivable should be analyzed by age and customer.
A buyer should ask:
How much money is actually collectible?
Look for:
- Overdue invoices
- Long payment terms
- Disputed invoices
- Customers with financial difficulties
- Unusual receivables
- Related-party balances
A growing receivables balance can sometimes be an early warning sign that reported revenue isn’t translating into cash.
5. Understand the company’s cash position
Cash is one of the simplest numbers to understand – and one of the easiest to misunderstand.
The buyer should verify:
- Bank balances
- Restricted cash
- Short-term investments
- Outstanding checks
- Debt
- Credit facilities
- Guarantees
- Unusual cash movements
It’s also important to understand the company’s normalized cash position.
For example, if the company received a large customer prepayment shortly before closing, that cash may come with an obligation to continue providing services.
The question isn’t just “How much cash is there?”
It’s “How much of that cash actually belongs to the business we’re acquiring?”
6. Look carefully at debt and hidden liabilities
Debt is easy to spot when it’s recorded correctly.
Other liabilities can be harder.
Financial due diligence should look for:
- Bank loans
- Convertible notes
- Shareholder loans
- Leasing obligations
- Guarantees
- Litigation-related exposures
- Employee liabilities
- Unpaid suppliers
- Tax liabilities
- Deferred revenue
- Contingent liabilities
The buyer should also review commitments that may not immediately appear in the headline debt figure.
The objective is to understand the company’s true net debt and financial obligations at closing.
7. Examine Israeli tax exposure
Tax due diligence is especially important when acquiring an Israeli company.
The review may cover corporate income tax, VAT, payroll taxes, withholding taxes, transfer pricing, tax incentives, and previous tax assessments.
International groups should pay particular attention to transactions between the Israeli company and related entities abroad.
The Israel Tax Authority requires reporting of certain international transactions between related parties, including information about the parties, transaction type, price, and whether the transaction was conducted on market terms.
Depending on the structure of the transaction, tax approvals or advance rulings may also become relevant. The Israel Tax Authority provides a specific process for prior approval of certain statutory mergers.
This is an area where specialized Israeli tax advice can prevent very expensive surprises later.
8. Review payroll and employee-related costs
For technology companies, employees are often the largest expense.
The buyer should therefore examine:
- Salary expenses
- Bonuses
- Commissions
- Pension obligations
- Vacation balances
- Severance obligations
- Employer contributions
- Payroll taxes
- Contractors
- Employee benefits
- Equity compensation
It’s also important to understand whether employees have accrued obligations that will remain with the company after closing.
In regulated sectors, employee-related requirements can be even more important. For example, the Israeli Ministry of Labor requires certain licensed service and manpower companies to obtain approval before transferring ownership while preserving their licenses.
9. Don’t forget options and equity compensation
Israeli technology companies often use employee options as an important part of compensation.
The buyer should review the company’s cap table and option pool carefully.
Questions include:
- How many shares are outstanding?
- How many options have been granted?
- How many options are vested?
- What is the exercise price?
- Are there unallocated options?
- Are there convertible securities?
- Are there shareholder agreements?
- Are there liquidation preferences?
A seemingly simple acquisition can become complicated if the fully diluted ownership structure isn’t understood from the beginning.
10. Analyze related-party transactions
Related-party transactions deserve special attention.
These may include transactions between the company and:
- Founders
- Shareholders
- Directors
- Sister companies
- Parent companies
- Other companies controlled by shareholders
The buyer needs to determine whether these arrangements are normal business expenses or whether they will disappear after the acquisition.
For example, a founder may charge the company rent for office space or provide services through another entity.
If the acquisition closes, will that expense continue?
And if it disappears, what is the company’s normalized EBITDA?
11. Normalize EBITDA
Reported EBITDA is not always the best measure of the underlying business.
During due diligence, buyers often make adjustments for unusual or non-recurring items.
These might include:
- One-time legal costs
- Founder expenses
- Unusual bonuses
- Acquisition-related expenses
- Temporary consulting costs
- Non-recurring revenue
- Personal expenses paid by the company
The goal is to estimate what the company’s earnings would look like under normal operating conditions.
This is important because valuation is often based on a multiple of an earnings metric.
If EBITDA is overstated, the buyer could end up paying too much.
12. Compare forecasts with reality
Every acquisition comes with a story about the future.
“The company will grow 50% next year.”
“Margins will improve.”
“Three major customers are about to sign.”
Maybe they will.
But financial due diligence should test those assumptions against historical performance.
Compare previous forecasts with actual results.
If management predicted 30% growth last year and achieved 8%, that’s useful information.
It doesn’t necessarily mean the new forecast is wrong. It means the assumptions deserve closer scrutiny.
13. Review working capital
Working capital can have a major impact on the final acquisition price.
The buyer should understand the company’s normal levels of:
- Accounts receivable
- Accounts payable
- Inventory, where applicable
- Accrued expenses
- Deferred revenue
- Other current assets and liabilities
In many transactions, the purchase agreement includes a normalized working-capital target.
If actual working capital at closing is significantly below the agreed level, the purchase price may be adjusted.
That’s why working capital isn’t just an accounting exercise. It can directly affect the economics of the transaction.
14. Check government grants and incentives
Israeli technology companies may have benefited from government programs, grants, or incentives.
These should be reviewed carefully during due diligence.
The buyer needs to understand:
- Which grants were received?
- What obligations came with them?
- Are there restrictions on transferring intellectual property?
- Are there repayment obligations?
- Could the transaction trigger a requirement to repay funding?
This can be particularly important in technology acquisitions where intellectual property is the main asset.
15. Look beyond the numbers
Financial due diligence shouldn’t happen in isolation.
The numbers need to be connected to the rest of the business.
For example:
Revenue should be compared with customer contracts.
Payroll should be compared with the employee list.
IP-related expenses should be compared with ownership and licensing agreements.
Tax positions should be compared with the company’s actual operating structure.
Cash flow should be compared with the business model.
This cross-checking is where many of the most valuable findings appear.
What should the buyer request?
A well-organized financial due diligence process usually starts with a structured information request.
Typical documents may include:
| Area | Documents to review |
|---|---|
| Financials | Financial statements, trial balance, management accounts |
| Revenue | Customer lists, contracts, billing reports |
| Cash | Bank statements, debt schedules |
| Working capital | AR/AP aging, accruals |
| Tax | Tax returns, assessments, VAT reports |
| Payroll | Payroll reports, employee costs |
| Equity | Cap table, option plans |
| Forecasts | Budget, business plan, financial model |
| Related parties | Agreements and transaction details |
| Government support | Grants, approvals, obligations |
The Israeli Tax Authority itself has information-request procedures for acquisitions and restructurings that can include items such as valuation studies, due diligence reports, purchase models, balance sheets at closing, acquisition agreements, purchase consideration, and assumed liabilities.
Common red flags
Some warning signs deserve immediate attention.
Rapid revenue growth with weak cash flow can indicate aggressive payment terms or collection problems.
Heavy customer concentration can make future revenue less predictable.
Declining gross margins may indicate pricing pressure or rising delivery costs.
Large unexplained adjustments to EBITDA can make profitability look better than it really is.
Significant related-party transactions may distort the company’s normal cost structure.
Unresolved tax issues can become liabilities for the buyer depending on the transaction structure.
Poor financial reporting can also be a red flag. If it takes weeks to produce basic financial information, integration may be painful.
Share deal vs. asset deal
The structure of the acquisition matters.
In a share acquisition, the buyer generally acquires the company itself, including its existing assets and liabilities. That makes historical liabilities and tax exposures particularly important.
In an asset acquisition, the buyer may acquire selected assets and operations rather than the entire corporate entity. The allocation of assets, liabilities, employees, contracts, and tax consequences then becomes critical.
The right structure depends on the transaction, and financial, tax, and legal advisors should work together before the structure is finalized.
For Israeli statutory mergers, the Israeli Companies Authority and Tax Authority have specific procedures and requirements, including corporate approvals and, in relevant cases, tax authority approval.
The goal isn’t to find a reason not to buy
Good due diligence isn’t about hunting for problems until the deal falls apart.
It’s about finding the truth before signing the check.
Sometimes due diligence confirms that the company is exactly as presented.
Sometimes it uncovers a problem that leads to a lower valuation.
Sometimes it changes the transaction structure.
And occasionally, it reveals a risk serious enough to walk away.
That’s not a failure of due diligence. That’s exactly what due diligence is supposed to do.
Final thoughts
Buying an Israeli company can open the door to valuable technology, talent, customers, intellectual property, and market opportunities.
But the numbers need to tell the same story as the pitch deck.
A thorough financial due diligence process should examine revenue quality, cash flow, working capital, debt, taxes, employees, equity, customer concentration, related-party transactions, government support, and future forecasts.
Most importantly, the review should turn financial data into a clear answer:
What are we actually buying, what risks are we assuming, and is the price justified?
For an international buyer entering an Israeli acquisition, local financial and tax expertise can be particularly valuable. Israeli M&A tax specialists routinely support buyers with pre-acquisition due diligence, transaction structuring, tax efficiency, and post-deal integration.
The best time to discover a financial problem is before the acquisition closes. After that, the problem isn’t the seller’s anymore. It’s yours.
