UAE, one of the most attractive business hubs in the Middle-East and African region. It is a gateway of opportunities for international businesses. Businesses to achieve the next level of growth have entered the UAE by setting up a new entity or Mergers and Acquisitions. Due Diligence plays a significant role in helping companies decide on going ahead with mergers and acquisition.
What is Due Diligence?
Due Diligence can be defined as an audit, investigation, or review performed to confirm information or details of a matter under consideration. Due Diligence requires a thorough examination of company financial records before entering into a proposed transaction with another company in terms of the financial world. The due diligence process is also a systematic way to analyse and mitigate any potential risk from operations or investment-related decision.
In cases of company mergers and Acquisitions, Due Diligence is a solid review or audit of a company that is usually undertaken before the process. The due diligence exercise in business aims to assure that any decision made regarding the company in consideration is an informed one, maximising the chances of adding value in any M&A transaction.
What is the Need for Due Diligence?
The main advantage of Due Diligence is it enables businesses to undertake transactions related to operations and Merger & Acquisitions from an informed standpoint. It helps the potential acquisition or buyer by undertaking a comprehensive risk and opportunity assessment of the business to be acquired. In case of the Due Diligence, it is always helpful to find the skeletons in the closet before finding them later, which can be harmful to the post-acquisition business.
Due Diligence can provide significant value addition for the buyer by clearly indicating the target company’s weaknesses (or red flags) as well as helps in identifying potential opportunities within the target business previously wasn’t aware of that existed.
The Due Diligence report helps one ascertain how the business plans to execute strategies and generate additional earnings (both monetary and non-monetary) value. Due Diligence serves as a trustable reckoner for understanding the state of company affairs at the time of purchase/sale, etc. It also increases the chances of successful deals by uncovering any existing significant problems or assets that need to be addressed before carrying out the transaction.
Most Important Things to Consider While Conducting a Company Due Diligence
- The Due Diligence process involves starting early with a robust plan and team Creation. The dedicated team can further utilize different checklists to identify and address any potential risks throughout the process before decision making.
- Due Diligence can be conducted using any trusted diligence management software by the trained staff.
- Companies can take the help of Professionals or Due Diligence experts to carry out the process. At the end of the required Due Diligence process, the expert consultant will submit a due diligence report for the acquiring company to make sound decisions.
Process of Due Diligence
The following steps are involved in the process of Company Due Diligence:
- Due Diligence involves examining a potential target for Merger & Acquisition or similar corporate finance transaction generally by the potential Acquisitor.
- A thorough investigation is undertaken into the current practices of process, procedures and company policies.
- An examination is to be conducted to make a Merger or acquisition decision based on valuation and shareholder value analysis principles.
- An examination is to be achieved by collecting answers for specific vital questions, including how do we buy, how much do we pay, and how do we structure an acquisition?
- Upon completing all the above steps, a final due diligence report is prepared and submitted to the company’s management.
The most important things to consider while carrying out due diligence process is like considering the past and current performance of the business, confirming the accuracy and authenticity of various reports, and ascertaining and concluding whether an M & A transaction is feasible and viable based on the acquiring company’s targets and goals.
There are 3 W’s which have to be addressed while drafting a due diligence report of a company. Who is your target customer of the business? What is a company objective? Which are the aspects that will drive the decision making of the acquiring business? If businesses can answer these questions and have a crystal-clear answer, then the companies can proceed with the decisions regarding mergers and acquisition.
Jaxa Chartered Accountants are among the leading auditing firms in the UAE, serving many local and international clients for many years. We guide our clients and assist them in carrying out the due diligence procedures, which will help the client make a sound and confident decision in acquiring businesses and achieve the next phase of business growth. Please Contact Us if you have any questions regarding the company due Diligence. We’d be happy to help!