Efficient and Effective Financial due diligence means carefully checking a company’s financial records, especially when buying or selling a business. It helps find hidden problems, checks if the company makes and manages money well, and makes sure the money records are correct. Whether you’re a buyer, seller, or investor, understanding this can help you make better decisions and avoid mistakes. You can also find trusted due diligence services in Dubai to help you with this process.

Tips to follow for Effective Financial Due Diligence

In a fast-paced market where business valuations are high and deals close quickly, buyers need to stay careful. It’s very important to do proper checks (called due diligence) to find any problems before making a big investment.

1. Focus on the Most Important Things First

• Buyers should aim for at least 45 days to conduct proper due diligence. In complex deals or when documents are delayed, more time may be needed.
• Not all questions are equally important. Ask for the most important information first—the matters that help you decide whether or not to move forward with the deal.
• Clearly communicate which requests are high-priority and which can wait. This makes things easier and faster for both sides.

2. Don’t Trust All EBITDA Changes Right Away

• If the seller shows changes to EBITDA (a way to measure profit) that are hard to understand or don’t have clear proof, be careful.
• If the adjustments are hard to explain clearly to your board or investors, dig deeper.
• Just because a bank agrees with the seller’s numbers doesn’t mean you have to. You don’t need to pay more because of that.
• Be skeptical of projected improvements. If those changes were so easy to implement, why didn’t the seller do it before?
• If the seller is helping you run the business for some time (a TSA or Transition Services Agreement), ensure you add the cost of running things on your own later in your budget.
• If the company did transactions with related parties in the past, check if the prices were fair. If not, update your plan with proper costs.

3. Know About Any Hidden Costs

• Sometimes, a company may have costs that could come up in the future such as legal claims, warranties, or pending penalties. These are called contingent liabilities.
• Buyers should avoid paying for these surprise costs, especially if they are not part of the day-to-day business.
• Try to understand how these costs are disclosed in the seller’s financial records. Are they written and explained clearly?
• Get written confirmation that the seller will settle these before the deal closes.
• Also, make sure the purchase agreement doesn’t mistakenly make you responsible for any of these old costs.

4. Cash is Important

• Cash flow tells the real story of a business’s strength.
• If the company’s customers are taking longer to pay, or if the company is taking longer to pay its bills, that could be a sign of problems.
• Check if the company tracks cash every month and if changes in ownership (equity) are recorded correctly. If not, the numbers may not be reliable.
• Be careful if the seller changes EBITDA (a way to measure profit) without including the real cash costs.
  • For example, if the seller is building software and calling it an asset, ensure your plan still includes the money spent.
  • If they remove stock-based pay from expenses, you need to consider how much cash you’ll need to pay employees instead.

5. Analyse the Budget – Are the Numbers Real?

• Look at the company’s old budgets. Did they meet their goals or miss them a lot?
• If it’s halfway through the year, check how the company is doing now compared to its plan. Are they on track?
• Try to understand how they make their budget. Do they guess or do proper work?
• Compare old results with what they say will happen in the future. Ask: Are their plans realistic?
• Try a few “what if” tests. For example, What if sales go down? What if costs go up? This helps you see the real risk in the deal.

6. Is the Seller Being Honest?

• Is the seller sharing everything openly, or are they hiding things?
• Is it hard to talk to their team or get answers? If yes, and they don’t have a good reason, that’s a red flag.
• Always ask: Does the information make sense? If things don’t add up, don’t ignore it. Look deeper.

Due diligence is the first step. Now it’s time to make your financial model stand out. JAKS is a consulting firm in Dubai that helps businesses handle their accounting and financial needs with ease. We offer services like bookkeeping, VAT filing, payroll, and monthly financial reporting.

Our secure system keeps your data safe, and we make business accounting and finance simple and worry-free. Looking for trusted Financial Due Diligence services in Dubai? Call +971 503372712 or email us at [email protected].