Due diligence: Definition, Types and Examples is a term commonly used in mergers and acquisitions, investments, partnerships, routine business decisions. And even day-to-day life. At JAKS, we provide expert due diligence services in Dubai, helping businesses assess risks, verify financial details, and make proper decisions.
What is Due Diligence?
Due diligence is the process of thoroughly verifying and evaluating all the information whether financial, legal or operational before entering into a business agreement or transactions. It is a safeguard to avoid wrong decisions before committing to a deal.
What is the Purpose of Due Diligence?
The main goal of due diligence is to reduce risk. It helps businesses:
- Identify hidden issues
- Confirm facts and figures
- Ensure regulatory compliance
- Make informed decisions
- Protect against legal and financial liabilities
Sometimes, due diligence will involve getting help from lawyers, accountants, tax experts, technical specialists and other expert professionals.
Types of Due Diligence
Due diligence is a company’s careful check before making a business deal, like buying another company. It helps understand the business, its assets, and its finances. There are different types of due diligence depending on the nature of transaction, including:
- Administrative Due Diligence
Purpose: Assess the company’s operations, facilities, and overheads to ensure smooth and cost-effective business continuity.
This means reviewing operational aspects such as office spaces, facilities, and administrative costs. It helps buyers ensure all expenses are recorded correctly, understand day-to-day operations and future cost implications.
- Financial Due Diligence
Purpose: To confirm financial health and uncover any hidden financial risks.
This process checks if a company’s financial details are correct. It helps buyers understand the company’s financial health before making a decision. It includes:
- Reviewing financial statements (typically the last three years)
- Analyzing cash flows, revenue and expenses
- Analyzing key customer accounts, costs, and profit margins
- Assessing debts, interest rates, and ability to repay loans
- Examining future sales and business growth plans
Financial due diligence ensures no hidden financial risks before buying or investing in a company.
Asset Due Diligence
Purpose: To ensure proper valuation and ownership of key assets.
This checks all the company’s assets to ensure they are correctly recorded and valued. It includes:
- Listing all fixed assets, their locations and current conditions
- Validating lease agreements for equipment
- Confirming lease terms for any rented assets
- Reviewing records of major equipment bought or sold in the last 3-5 years
- Verifying property documents like deeds, mortgages, and permits
While asset due diligence often focuses on fixed assets like property and equipment, it also includes intangible assets (e.g., software, licenses), inventory, receivables, leased assets, and investments. A thorough review ensures all key tangible and intangible assets are accurately valued and accounted for.
Human Resources (HR) Due Diligence
Purpose: To assess workforce stability and identify potential HR liabilities.
This process examines employee-related matters to understand risks and ensure smooth workforce management. It includes:
- Checking the employees headcount, vacancies, turnover, retirements, and notice periods
- Reviewing salary structure, bonuses, and benefits of employees
- Examining employment contracts, including confidentiality and non-compete agreements
- Reviewing company HR policies on leave, sick days, disputes and employee benefits
- Identifying any labour law violations or pending legal matters like wrongful termination or discrimination cases
- Checking labor disputes and their possible financial impact
- Listing employee benefits, insurance policies, and stock options
HR due diligence helps avoid legal and financial risks in business deals.
Environmental Due Diligence
Purpose: To avoid fines, closures, or negative publicity due to non-compliance
This checks if the company follows environmental laws. If not, it may face fines or even be shut down. Important checks include:
- Reviewing all environmental permits and licenses
- Checking for any notices or warnings from government agencies
- Verification of waste disposal methods
- Identifying any ongoing environmental issues
Tax Due Diligence
Purpose: To prevent legal issues or financial penalties from tax non-compliance.
This ensures the company has paid all its taxes correctly and has no compliance violations. It includes:
- Reviewing tax filings for the last 3-5 years
- Checking for ongoing or past tax audits
- Confirming tax liabilities and deferred tax assets
- Identifying available tax benefits or exemptions
- Examining correspondence with tax authorities
Doing tax due diligence helps avoid fines and legal issues.
Intellectual Property Due Diligence
Purpose: To protect valuable business assets and avoid infringement issues.
Intellectual property (IP) includes patents, trademarks, and copyrights that make a company’s products or services unique. Evaluating IP is important to protect business value. Key things to review:
- List of patents and patent applications
- Records of trademarks, copyrights, and brand names
- Documents for any pending patents
- Any legal disputes related to IP ownership
Legal Check
Purpose: To ensure legal compliance and avoid future disputes.
A legal check ensures the company follows all rules and has no legal risks. Important documents to review:
- Company registration documents and licenses
- Records of board and shareholder meetings for the last three years
- Share certificates of key executives
- Contracts with partners, suppliers, and customers
- Loan agreements and bank credit details
- Any legal cases involving the company
These checks help avoid problems and ensure smooth business operations.
Examples of Due Diligence in Action
Due diligence can vary depending on the situation. Here are a few examples:
- Marketing Agency
A marketing agency planning to implement a new software tool would evaluate cost, reviews, cybersecurity, and software compatibility.
- Company Acquisition
Before acquiring another company, the buyer evaluates HR contracts, tax compliance, financials, and legal risks to make an informed decision.
- Nonprofit Partnership
A nonprofit entering a tech partnership reviews the vendor’s data privacy policies, security infrastructure, and reputation to ensure regulatory compliance and safety.
These examples show how due diligence can differ depending on the business needs.
Why Due Diligence Matters for Your Business
Performing proper due diligence can:
- Prevent financial losses
- Ensure fair valuations in acquisitions or sales
- Attract investors with transparency
- Ensure compliance with UAE laws and regulations
- Support better decision-making for long-term growth
JAKS is a trusted consultancy firm offering accounting, audit, tax consultancy, business consultancy and transaction advisory services in Dubai to help businesses manage their finances smoothly. From financial and tax reviews to legal and HR checks, we ensure every aspect is covered to protect your interests.
We also offer a full range of accounting services in Dubai, including bookkeeping, VAT filing, payroll, and financial reporting while ensuring compliance with all regulations.
Our secure system ensures data protection and stress-free compliance. For reliable business advisory services in Dubai, call +971 503372712 or email [email protected].
