Financial Due Diligence is different from a statutory audit. It is an in-depth investigation of its finances to report its financial stability and performance. Unlike an audit, it provides a better understanding of the company’s current and future financial forecasts. The review helps investors, lawyers, the government, and even the company analyse their business model and sustainability. In the UAE, we have seen many big players in the market, such as banks and multinational companies having successful mergers and acquisitions. Various countries are looking to invest in the UAE. What makes such deals successful? It is a transparent report.
Defining Financial Due Diligence
It is a conscientious examination of a company’s current and historical records and provides a meticulous review of the financial forecasts. There are several checkpoints to cover in a due diligence study, and it is an independent study that an investor or a government party can request.
When is a company in the UAE required to conduct a Due diligence audit?
Emirates such as Dubai, RAK, Sharjah, and Abu Dhabi are the key commercial centres of the UAE. Investors across the globe want to invest in the UAE. That being the case, when companies want to acquire a business, invest in businesses, purchase or partner with businesses, a due diligence audit review is required.
There are two perspectives on Financial due diligence
The buy-side
The buy-side of due diligence is companies looking to invest, purchase or partner in other companies. An independent due diligence review provides information to the buy-side party about information that may be hidden, misrepresented or even erroneously stated in the financials. Like a salesperson trying to sell your products by painting a perfect picture, the investor needs to understand the benefits of buying or investing in the product in the current and future times.
A buy-side it focuses on critical areas such as cash flows, the essential drivers of value, and the management of operations that will prove the success of their investments in the future.
Some questions that a buy-side financial due diligence answer is:
Why does the company require an investment?
Does the company have any legal disputes?
Is there proper management in the organisation regarding human resources, IT, Health and safety, Tax, sales and marketing etc.?
Are you being misled on specific financial or operational issues?
The Sell-side
The company’s sell-side may ensure that the information presented to the buy-side is accurate and doesn’t relinquish their desire to invest or purchase. Therefore, the sell-side needs to conduct it, so they don’t present misinformation or window dress their financials. If you are on the sell-side of a financial Due Diligence review, you must refrain from submitting information to your clients or partners before the financials are reviewed. It will only help mitigate the risk of any shortcomings in its financial forecasts. A failed deal is the only consequence of lacking importance given to due diligence audits. Therefore, leading a controlled sales process is possible by providing a transparent and communicable due diligence report.
Some questions that a sell-side financial due diligence answer is:
Is it the right time to sell? If not, then when?
What areas add value to my company, and what areas possess risk?
How can I set up an A-team to successfully close the deal?
How do you handle the risk areas of the business?
What are the areas covered in this?
- Historical data of Financial statements for the past five years
The financial statements can provide information about the company’s daily operations to its yearly performances. A due diligence study shows the potential and the volatility of the company’s earnings. If there is a sudden influx of revenues and cash flow, that does not align with the industry trends. How can the company survive without the potential money-making clients? The asset value must be justified and higher; any unjustified balances lying on the balance sheet without proper reasoning are all disclosed in the report.
- An in-depth study of financial ratios
Financial ratios are used by various professionals in the UAE, such as credit risk analysts, auditors and financial institutions. Financial ratios provide a synopsis of the entire financial statement regarding numbers and percentages. Some of the important ratios that are covered in the due diligence report are
Current Ratio– Does the company have enough liquidity to pay its short-term liabilities?
Debt Ratio– A due diligence study will provide the company’s leverage in terms of its assets and liabilities. It has to find out about hidden liabilities that may cause a risk of default in the future.
Operating margin– Is the company’s operation model sustainable enough for the future to generate profits?
Interest Coverage Ratio– Also known as the times earned Ratio, can determine the company’s ability to pay interest and sustain in the long run.
Profit Margin– the ultimate profit that is churned after all the deductibles is the profit margin. A due diligence report also determines the business’s profit drivers and key revenue indicators.
Asset Turnover Ratio– Assets are valuable if used to their potential. A due diligence report provides an in-depth study of the company’s assets that are in use and assets that can be used to further the revenue for the company.
Asset Coverage Ratio– Liquidity is one of the investors’ primary areas of interest. Why would a company invest in a specific project or another company if the assets are outdated? An asset coverage ratio will project the insolvency of the assets in the future.
Several such critical ratios are used in the review of the company, where investors take a keen interest in anatomising an organisation’s health. In Dubai and other Emirates of the UAE, the review is critical since several investors are in multiple business areas. Audit firms in Dubai, such as farahatco, conduct both buy-side and Sell-side Audit for companies to transparently and accurately represent their financial data.
Importance of conducting financial due diligence with Audit firms in Dubai
Audit firms in Dubai have a successful track record for conducting Due Diligence Audit and reviews for Multinational companies, including banks and other financial institutions. they have provided valuable insights to organisations requiring the most detailed attention to determine the closure of the deals between the buy and sell parties.
