Due diligence is one of the most important steps when buying a business, investing in a company, or forming a partnership. It helps you look closely at a company’s financials, operations, legal matters, and more before making a final decision. The main aim of due diligence is to find any hidden problems that might cause risks later. Spotting red flags early can save you from significant losses and bad decisions. This is where JAKS can help. With years of experience in financial and business consulting, JAKS offers expert due diligence services that cover everything from financial reviews to legal and compliance checks.

5 Red Flags to Watch for During Due Diligence

Let’s read about five red flags;

1. Poor Financial Records

One of the first things to check is the company’s financial health. If the financial records are missing, incomplete, or poorly maintained, it’s a major red flag. A business with unclear books might hide losses, debts, or fake income figures. Here’s what to watch for:

• Irregularities in income statements and balance sheets
• Sudden jumps or drops in revenue without a clear reason
• Outdated financial records or missing audit reports
• Unexplained expenses or vague cost breakdowns

These issues suggest that the company is not being honest or lacks proper financial management, which can affect long-term sustainability.

2. Legal or Compliance Issues

Legal troubles or failure to meet government rules can cause serious problems for any business. During due diligence, always check if the company follows all required laws and has no ongoing or past legal cases that could affect its future. Be cautious if you find:

• Ongoing or past lawsuits
• Missing licenses or permits
• Non-compliance with tax laws or labour regulations
• Pending fines or legal warnings

Legal problems can lead to financial loss, penalties, or even business shutdowns. Always get a legal expert to help review these documents carefully.

3. High Employee Turnover

Another warning sign is frequent employee departures. High turnover means poor management, low employee satisfaction, or a toxic work environment. These issues can hurt productivity and damage the business’s reputation. Ask questions like:

• Why are employees leaving so often?
• Are key positions vacant or constantly changing?
• What do exit interviews reveal?

If many important staff members have recently left, business performance and client relationships could be affected. Before making any decisions, ensure the company has a strong and stable team.

4. Overdependence on One Customer or Supplier

A good business should have a variety of customers and suppliers. It is risky to rely heavily on just one customer for most of its revenue or one supplier for its products. Losing that customer or supplier could badly impact the business. Look for:

• Revenue concentration (more than 30-40% from one client)
• No backup plans if a supplier fails
• Short-term contracts with key clients or vendors

This lack of diversification can make the business vulnerable. During your checks, always ask about customer relationships and supply chain plans.

5. Unclear Business Model or Future Plans

If the company’s business model is unclear or lacks a solid growth plan, it shows poor planning or weak leadership. A strong business should know where it stands and where it wants to go in the next few years. Be careful if:

• The company can’t explain how it makes money
• There’s no strategy for future growth
• The leadership team lacks vision or direction

A company without a clear path might struggle to stay competitive or grow in a changing market. Make sure it has a sensible business plan and goals. Due diligence is all about digging deep and asking the right questions. Red flags don’t always mean you should walk away, but they tell you to proceed cautiously. Some issues might be fixable, but others could be deal-breakers.

Work with professionals like financial advisors, accountants, and legal experts during the due diligence process to make a smart decision. The goal is to confirm what looks good on the surface and uncover what lies beneath. You can protect yourself by watching out for these five red flags, poor financial records, legal issues, high employee turnover, overdependence on a single customer or supplier, and unclear business plans and making better choices for your investments or business deals.

JAKS is a trusted consultancy firm based in Dubai. We offer expert due diligence services to support smooth mergers, acquisitions, and investment decisions. Our team also provides Transaction Advisory, business consulting, bookkeeping, tax compliance, payroll, monthly financial reporting, and other advisory services. 

With a secure system, we ensure your financial data stays safe while making the due diligence process clear and stress-free. For reliable due diligence services in Dubai, call +971 503372712 or email [email protected].