Due Diligence Audit Services

due diligence connotes “investigation”.

You don’t put your John Hancock at the bottom of the page of the deal, shake hands and crack the news with a million-dollar smile on your face just like that. Deals are prepared to appeal to the target buyers. You can’t fall for it without prior investigation. How could you buy a huge company without KYC when you don’t purchase even a mobile phone for yourself without adequate research – whether the phone you are going to shell out a fortune on is suitable for you or not. There are tons of things to know and understand when you are getting into some deal, accepting a business proposal or investing in some business expansion opportunity. For instance, what is the nature of a deal? What are the risks involved? And whether the deal fits with your portfolio? Due diligence audit helps you find all your answers.

Due Diligence: Preface

Just because the term is broadly used across various disciplines, the meaning of due diligence doesn’t change. In one word – due diligence connotes “investigation”. In the context of business, it refers to the investigation done by an interested party, including venture capital and private equity firms, into a merger or acquisition target or to inspect companies for potential investments. It helps a buyer organization to evaluate the economic health and performance of the seller company by illustrating the company competencies, the target market, potential customers and profit-making capabilities before moving ahead with the offer proposed. In layman’s terms conducting due diligence is like doing “research work” on a potential deal to keep the unpleasant surprises at bay in the future. This homework today is crucial to making informed investment decisions tomorrow. Because prevention is always better than cure!

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Due Diligence: Objectives

Mistakes are sure to occur when you are doing huge transactions in your business. Even a tiny mistake can lead to big troubles when you are in a business especially in the UAE. Whether a new supplier, a partner in a transaction or an acquisition target, third party relationships not just produce opportunities but risks too. And financial and reputational costs can be significant if something goes wrong. Therefore, the management should take special care not to make any mistakes. But how? Due diligence audit is the answer. And the purpose is as clear as day. Due diligence audit is conducted to:

Steer clear of a bad business transaction
Corroborate the transaction whether it adheres to investment or acquisition criteria

Ascertain the risks and opportunities that comes with a proposed transaction
Slash the risk of post-transaction disagreeable surprises
Vet the business affairs as a vigilant business owner
Bear out all material facts associated with the business
Verify the too-good-to-be-true deals
Ensure that the business is what it appears to be
Foster trust between two independent parties

Due Diligence: Benefits

While a typical audit seeks only to provide an opinion on whether the past financial statements represent a ‘true and fair’ view of the company’s operations, financial due diligence is way beyond bringing myriad advantages to the management and ownership. Not only does the financial due diligence auditor dig into the historical financial performance of the company but the forecast financial performance and its viability under the current business plan as well for the company. Plus, the reasons for any trends noticed in the results of the target company over an appropriate time period are also studied to notify the company about the applicability of the same to the proposed transaction. Not only that but depending upon the scope of the work undertaken a financial due diligence audit:

Betters the business status.
Helps unveil any invisible information about the business.
Functions as a risk appraisal tool for a business.
Let’s buyers make informed decisions and sidestep surprises at the end of a deal.
Empowers buyers in ‘caveat emptor’ while ensuring that they are free from defects and fit for purpose.

Vouches that the buyers ‘get what they pay for’.
Confirms whether the information provided by the target/seller is reliable.
Tells if the historical earnings of the target company are sustainable.
Helps figure out potential future earnings of the target company
Informs about the possible synergies associated with the proposed acquisition.
Enlightens about immediate and future tax consequences of the proposed acquisition.
Informs whether the purchase price is fair (given the results of the due diligence process).
Conveys about any potential deal breakers (based on the outcome of the due diligence).
Mentions whether the proposed structure of the acquisition is appropriate.
Guides the company on including any warranties and guarantees in the legal documentation.

Due Diligence: Types

Due diligence is used majorly in the legal and corporate realms. You might come across four types of due diligence audit in UAE relevant for your business:

Financial Due Diligence

The financial due diligence process helps the buyer companies recognize the true financial picture of the company making an offer to them. In this process, the appointed auditor scrutinizes the financial data and finds out the areas where there are potential risks. The review involves investigating fixed costs, variable costs, profit margins, internal control framework, and major customer accounts up to the hilt. The report produced after a thorough financial diligence provides insights about the company’s financial history and current performance. It also helps the interested party to forecast future growth and investment.

Commercial Due Diligence

Commercial due diligence cares for the broader aspect in comparison to financial due diligence. Instituted by a prospective buyer, commercial due diligence is performed to determine the various commercial factors including competitors’ analysis, target market research, product reviews, service feedbacks & any other data the acquirer wants to know about the target company. Through this process, a private equity firm surmises how much a company is commercially appealing. In addition to the financial health of the company, it also acts towards the internal as well as external environment of the target company. A commercial due diligence report helps one yardstick the company’s performance and its probability to meet the target. It also lets the buyer learn about the potential problems they may come across as a result of the acquisition.

Operational Due Diligence

The operational due diligence centrally focuses on investigating the non-financial factors of a company. To have a better understanding of business operations, organizational structure, internal process & system, performance evaluations of the management team and HR process of a specific company, auditors in UAE conduct this type of due diligence audit. The in-depth analysis helps one in identifying whether the internal structure of the company is flexible enough to fit into the buyer’s business. All in all, it highlights process improvement opportunities and performance gaps.

Legal Due Diligence

Legal due diligence helps the prospective company to determine any legal risks involved with the target company. The process involves gathering and evaluating all of the legal documents and information relating to the target company. It allows both the buyer and seller to examine any legal risks, such as lawsuits or intellectual property details, before closing the deal. It also figures out if the target company is undergoing any legal disputes whether with local bodies, competitors or with its own employees. The process verifies the legal aspects of a transaction. Thus, the legal structure of the entity, contracts, and agreements, assets and liabilities, contingent liabilities, and pending legal proceedings are investigated thoroughly.

FAQ

When due diligence is required?

You might require a due diligence audit to fulfil a legal obligation, but by and large the term is applicable to voluntary investigations. The audit enables the management to assess the present financial condition of their company while unveiling any issues in the businesses and thus allows them to act on the said information and take appropriate measures to rectify the course of the business.
Usually, the need for a due diligence audit arises when a company gets into merger & acquisitions of business and wants to identify the financial performance, figure out earning capabilities, know current financial position, understand prospective customers, and learn competency level of the target company’s management. On acceptance of an offer to acquire a business, the seller should allow the prospective buyer to conduct its due diligence investigations on the target company. This investigative process mainly revolves around legal, financial and operational areas. The extent of the procedures required under each area will be decided by the size and nature of the individual transaction. The due diligence report prepared by the due diligence audit firms helps in decision making, keeping all risks and opportunities in view.

What information is required to complete the financial due diligence investigation?

Well, it depends upon the scope of work agreed along with the reporting capabilities of the target company. The main sources of information for the review include:
1. Historical financial data (in conjunction with statutory financial statements & detailed management accounts)
2. Current financial data (for instance year-to-date management accounts)
3. Forecast financial information (containing business plans, budgets & cash flow forecasts)

Who governs mergers and acquisitions in Dubai?

One of the most developed markets in the Middle East and North Africa (MENA) region, the mergers and acquisitions (M&As) market in the UAE does not have a specific legislation covering M&A transactions. It’s the Company Law that provides for such types of transactions. While mergers of onshore companies in Dubai are regulated by the Company Act, mergers of free zone companies in Dubai come under Financial Free Zone laws. In the case of public companies, the mergers must be authorized by the Securities & Commodities Authority. Dubai has special laws to deal with mergers of oil & gas companies and financial institutions.

What is a merger in Dubai? How many types of merger transactions can a company in Dubai undergo?

According to Dubai Commercial Code, a merger is “the dissolution of two or more companies and the incorporation of a new company” which will gather the liabilities of all dissolved entities. In this case, the new company will acquire the rights and obligations of the old company that doesn’t exist anymore. Companies in Dubai can go through two types of merger transactions:
1. Absorption,
2. Combination

What risks are involved in M&A?

There is no magic formula to make mergers and acquisitions successful. Like any other business process, they are not inherently good or bad, just as marketing and R&D aren’t. Following are the risks that you might stumble upon in the absence of a due diligence conducted by an expert.
1. Overpaying for the target company
2. Overestimating synergies
3. Weak due diligence practices
4. Integration shortfalls
5. Little attention to culture and change management
6. Overall lack of communication and transparency
7. Failure to capture synergies
8. Threats to security
9. Unexpected costs associated with the deal
10. Unforeseen market disruptions and/or “Acts of God”

How outsourcing due diligence can help me?

When done by an expert in the field, a financial due diligence review furnishes valuable information to support the proposed acquisition and to detect early the nature and extent (and potential impact on value) of any material risks in the target business, any troubles which will need to be addressed (and the associated costs to do this) and whether acquiring the business will add real value to the purchaser.

How much due diligence outsourcing is going to cost me?

The costs of due diligence may vary depending on the scope of work and cost-drivers involved. No matter how much your due diligence auditor is going to charge you for the services, performing due diligence before considering any proposal is never a bad idea because the costs of performing thorough financial due diligence far outweigh the costs of making a bad acquisition. A comprehensive due diligence performed by a qualified due diligence auditor multiplies the chances of success in a transaction.

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Due Diligence Audit Services