Financial Due Diligence in UAE M&A

Discover the essential aspects of conducting financial due diligence in the United Arab Emirates (UAE) for mergers and acquisitions. Learn how to mitigate risks, make informed decisions, and ensure the success of your M&A deals in the UAE market.

In the UAE there is a growing trend for business groups to merge. This hits a whole range of things and it is for this reason that companies turn to accounting firms in the UAE. These bookkeeping and accounting services in Dubai help their clients with all range of things like corporate tax int he UAE for instance. 

Challenge area regarding due diligence process in UAE

In the context of mergers and acquisitions the due diligence process in the UAE covers a wide range of areas include things like operations, legal and financial matters. Accounting firms in the UAE help with these things and more. The extent of procedures required under each area is all upon the nature of the actual transaction.

So what needs to be done, why, when and how?

Due diligence process in UAE

What is a financial due diligence review? Financial due diligence process in the UAE is not an audit. A comprehensive audi for mergers in the UAE is concerned with past financial statements only and gives an opinion as to whether the financial papers represent a ‘true and fair’ view of the company’s operations. A financial due diligence process in the UAE, on the other hand, would incorporate a greater scope.

Accounting firms in the UAE and due diligence

A financial due diligence process in the UAE review would not only look at the historical financial performance of a business. They also consider the forecast financial performance for the company under the current business plan and consider the reasonableness of such forecasts.

Another major difference between an audit and a financial due diligence review is that, where an audit reports only on the truth and worthiness of the financial results. A financial due diligence review will investigate reasons for the trends observed in operational results of the company. That is over a relevant time period and report on this in terms of relevancy for the proposed transaction.

Clearly, the scope of each financial due diligence will be unique. They depend upon the nature of the transaction and the size of the company or business operations being acquired. In general a financial due diligence process for mergers would typically involve a review o historical financial things. For instance current financial position, forecast financial results, working capital demands, employee entitlements provisions. Also, valuation issues, risks and opportunities, and taxation implications.

The key to determining an appropriate scope for financial due diligence is clear identification of the risks surrounding the potential acquisition.

When do I need a financial due diligence review?

Financial due diligence should be undertaken whenever a company is considering acquiring a new business (whether it be by acquiring share capital of an existing company or purchasing the business operations and assets only).

However the benefits of financial due diligence reviews are not restricted to merger and acquisition steps. They can also be useful in checking the merits of handling of certain existing corporate divisions within a business. A financial due diligence review is also a key component of checking investment requirements for venture capital arrangements.

Who can I instruct?

A financial due diligence review can be done either internally, by the acquirer’s own accounting and finance function, or by external independent due diligence experts.

The benefit of using external accounting firms in the UAE. is that the review is based on an independent viewpoint from a party. This is who has no direct interest in the outcome of the proposed transaction.

Further, by outsourcing the financial due diligence review, internal resource time can be dedicated to consideration of operational due diligence procedures. Operations such as the logistics of merging the policies and procedures of both the acquirer and target in an efficient and effective manner.

When should I instruct them?

Ideally, the financial due diligence process should commence as soon as practical when negotiating to acquire a company or business.

Generally once a heads of agreement has been drafted setting out the structure for the deal. Only then financial due diligence should begin. Importantly, sufficient time should be allocated to the financial due diligence process in the UAE. The reason as the outcome of the review may provide valuable information. This data is required to ensure a fair purchase price is agreed uponwhere necessary, the appropriate guarantees and provisos are put in place.

What information will they need?

The information required to complete a financial due diligence review is dictated by the agreed-upon scope as. Not just this as well as the reporting capabilities of the target company. The main sources of information for a review include:

  • Historical financial data, including statutory accounts, detailed management accounts and reports and income tax returns. Where statutory accounts have undergone financial audits for mergers. Access to audit work papers may also aid the financial due diligence process
  • Current financial data, such as year-to-date management accounts
  • Business plans and forecast financial information (including budgets and cash flow forecasts)
  • Minutes of Directors’ Meetings and Management Meetings.

What will I get out of a financial due diligence review?

Depending upon the scope of the procedures conducted, a review should provide answers to the following questions:

  • Is the information provided by the target/vendor reliable?
  • Are the historical amounts of money of the company sustainable?
  • What are the potential future earnings of the company, including the impact of new accounting standards on those earnings?
  • What are the possible upsides associated with the proposed acquisition?
  • What are the immediate and future tax consequences of the proposed acquisition?
  • What plans need to be put in place for the post-merger implementation process?
  • Is the purchase price fair, given the results of the due diligence process?
  • Based on the final result of the due diligence, are there any potential deal breakers?
  • Is the acquisition structure appropriate and should any issues such as guarantees be included in the purchase documentation?

The way forward with financial audits for mergers

The due diligence process is more than following through a standard checklist of procedures in order to provide a ‘tick’ for a proposed acquisition. When done the right way, a review provides valuable data to support the proposed acquisition. This helps identify early the issues that you need to address to combine companies and businesses successfully. There have been numerous high-profile examples that have proven the cost of performing expert financial due diligence far outweighs the cost of a bad acquisition.

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