What International Investors Should Know About Financial Due Diligence Israel

There is growing interest more than ever for international investment in Israel due to its technology innovation, thriving startup scene, and consistent business growth. For foreign investors it is critical to conduct financial due diligence before investing in Israeli companies. 

Making informed business and investment decisions starts with comprehensive financial due diligence. Whether for mergers and acquisitions, fundraising, or strategic investments, due diligence is essential for identifying risks, validating financial performance, and understanding the true value of a transaction. 

At SZ Shvarts Zedkia we mitigate risks and support smarter decision-making. We help conduct financial due diligence to evaluate the financial health of an Israeli company. This allows international investors and stakeholders to assess opportunities with clarity and confidence.

Understanding Financial Due Diligence for Investors

Financial due diligence is a comprehensive review of a target company’s financial statements, cash flows, tax position, and underlying assumptions to verify accuracy, sustainability, and risks before an investment or acquisition. 

For an international investor considering investing in an Israeli company, it is especially important because it helps identify cross-border risks such as differing accounting standards, tax exposures, currency issues, regulatory compliance gaps, and hidden liabilities, enabling investors to make informed decisions and protect value.

The objective is to evaluate the accuracy of financial statements, assess liabilities, and investment risks.

Key Steps in a Due Diligence Process

Working closely with the client, the financial due diligence process involves evaluating the risk profile of the transaction, challenging assumptions about future performance, and highlighting issues that may impact valuation or long-term performance. 

This process typically involves a team of accountants, financial advisors, tax specialists, and business strategists to conduct both local and cross-border due diligence effectively.

The key steps include: identifying and quantifying industry and deal-specific risks and opportunities, reviewing historical financial statements and projected cash flow analysis and earnings, assets, and liabilities. Also it includes reviewing employee contracts, understanding company obligations and commitments, and identifying tax exposures.

In order to evaluate the financials of an Israeli company, it's important to partner with a financial firm like SZ Shvarts Zedkia that are experts in conducting financial due diligence.

Assessing Israel-Specific Investment Risks

Market & Economic Volatility - Israel’s economy is innovation driven and heavily weighted toward technology, which can amplify exposure to global market cycles, funding conditions, and sector specific downturns. Geopolitical developments may also influence investor sentiment, capital flows, and short-term volatility, even when company fundamentals remain strong.

Regulatory & Operating Environment - Israel has a sophisticated and regulated business environment, with frequent updates to tax, labor, data privacy, and reporting requirements. Foreign companies need to anticipate the administrative expectations, particularly around VAT registration, payroll compliance, transfer pricing, and ongoing filings with the Israeli authorities. Working with a financial partner like SZ Shvarts Zedkia for ongoing compliance and financial consulting can alleviate these burdens.

Currency & Financial Exposure - Transactions are often conducted in multiple currencies (ILS, USD, EUR), creating exposure to exchange rate fluctuations and cash-flow mismatches. Proper treasury planning and hedging strategies are needed to face currency risks to prevent it from materially affecting profitability and valuation. Having a competent CFO to oversee the process helps.

Financial Indicators to Examine

When evaluating a company for international investment, investors must focus on financial metrics that reveal both performance and long-term sustainability. 

Key revenue indicators include growth consistency, customer concentration, and the balance between recurring and one-time income, while profitability is assessed through gross margin, EBITDA, operating margin, and net profit margin. 

Liquidity metrics such as current and quick ratios, operating cash flow, and cash burn rate help determine whether the company can meet short-term obligations and sustain operations. Debt analysis should include leverage ratios, interest coverage, and debt maturity schedules to identify financial strain or refinancing risk. 

Hidden liabilities often emerge in the notes put on financial statements, including contingent legal claims, off-balance-sheet commitments, unpaid taxes, and aggressive revenue recognition practices. 

For international investors, these risks are amplified by cross-border tax rules, labor laws, accounting standards, and currency exposure. Conducting a thorough financial due diligence enables investors to uncover hidden risks, properly value the opportunity, and identify businesses with sustainable, compliant, and scalable growth potential.

Choosing the Right Approach

While some investors attempt to conduct due diligence in-house, doing so in Israel often proves inefficient due to local regulatory complexity, tax rules, labor laws, and unique accounting practices. Hiring specialized advisors in Israel enables faster, more accurate assessments of financials, compliance risks, and hidden liabilities that are easily overlooked by foreign teams. 

Professional due diligence services reduce risk, ensure regulatory compliance, and provide clarity on valuation, sustainability, and deal structure. For international investing in Israel, following a structured due diligence checklist means evaluating financial statements, assessing tax and operational risks, and confirming compliance. This builds investor confidence and significantly mitigates cross-border investment risk.

Contact us to learn more about how we can support your Financial Due Diligence in Israel

Frequently Asked Questions (FAQ's)

Q1: What is financial due diligence and why is it important for international investing? A: Financial due diligence ensures investors verify financial statements, assess risks, and make informed decisions before committing funds.

Q2: How do I evaluate an Israeli company’s financials effectively?  A: Review balance sheets, cash flow statements, revenue trends, and liabilities to accurately assess the financial health of Israeli businesses.

Q3: What are the main Israeli business investment risks?  A: Risks include market and geopolitical volatility, regulatory changes, currency fluctuations, and compliance challenges specific to Israel.

Q4: What should a due diligence checklist for investors include? A: It should cover financial statements review, corporate governance, tax compliance, liabilities, and contractual obligations.

Q5: How do cross-border investment due diligence practices differ in Israel?  A: Investors must account for Israeli laws, tax rules, currency exchange, and local corporate regulations.

Q6: What is corporate due diligence for foreign investors? A: It involves assessing a company’s governance, compliance, contracts, and financial records to ensure transparency and mitigate risks.