Key Steps in Financial due diligence is important for businesses, especially when they grow and enter mergers or acquisitions (M&A). No deal is complete without proper checks, and financial review takes the most time. This is especially important for businesses that need due diligence services in Dubai, where clear financial records and rule compliance matter a lot.
What is Financial Due Diligence (FDD)?
Financial due diligence is a detailed check of a company’s financial records. Before making business decisions, it helps understand past performance, future growth, and possible risks.
Scope of Financial Due Diligence
The process varies depending on the business size and industry. Key areas include:
- Checking revenue, cash flow, and profit margins.
- Reviewing taxes, debts, expenses, and future financial plans.
- Identifying financial risks and obligations.
- Examining other important factors that may affect the business.
How to Do Financial Due Diligence?
Financial due diligence (FDD) happens in four main steps:
1. Preparation
Before you start, check if the company is right for you.
- Does it match your business goals?
- Does it fit your industry?
- Is there enough demand for its products or services?
2. Research
Once you decide to move forward, gather details about the company.
- Talk to key people in the company.
- Check public reports, news, and financial records.
- Ask for internal documents like balance sheets and meeting notes.
- Visit the company’s office.
- Get third-party financial audits
3. Checking Information
After gathering details, make sure they match the actual company records.
- Decide what areas to check.
- Identify key financial details.
- Review past financial reports.
- Talk to company leaders about the findings.
- Understand what the findings mean for the business.
- Prepare a final report.
4. Analyzing Data
Once all information is collected, analyze it carefully:
- Check past income and expenses.
- Compare financials with similar businesses.
- Review cash flow and available funds.
- Look for any signs of financial issues.
- Check assets, debts, and long-term loans.
- Verify business agreements with suppliers and clients.
- Study competition in the market.
- Identify any weak areas in operations.
- Review company products and services.
- Examine financial records.
- Assess how well the management team is performing.
Steps in Financial Due Diligence
Let’s read about some of the steps involved in financial due diligence;
Know the Company’s Size
First, you can determine the company’s size by its market capitalization (the total value of its shares). Market capitalization helps you understand:
- How stable the company is.
- How many people own its shares?
- How much its stock price may change.
Big companies usually have steady earnings and lower risk. Smaller companies may focus on specific markets and have more ups and downs in stock prices.
Check Revenue and Profit
Review the company’s profit or loss of the last two years. From looking at these records, you can easily find the necessary information. By searching the financial news websites, one can find more information.
Compare with Competitors
See how the company performs compared to others in the same industry. Check the profit margins of two or three similar companies to understand:
- The size of the market.
- The company’s main competitors.
- How strong the company is in its industry.
Most stock research websites list competitors and compare key financial details.
Check Company Value
Now, look at how the company is valued in the market. A useful ratio is the Price/Earnings to Growth (PEG) ratio, which helps see if the stock price is fair based on its growth. Compare this with similar companies.
Another key ratio is the Price-to-Earnings (P/E) ratio. Since earnings can change, this ratio helps compare the company’s stock price with competitors and the overall market.
Management and Ownership
Find out who is running the company and who owns it. Do the founders still manage it, or has new leadership taken over? Younger companies usually have their founders involved, while older ones may have different managers.
Check the experience of the top managers. This information can be found on the company’s website or in official reports.
These are some examples that show due diligence changes based on business needs.
These are some examples that show due diligence changes based on business needs.
JAKS is a trusted consultancy firm in Dubai, providing expert due diligence services to help businesses easily enter into mergers or acquisitions.
We handle Transaction Advisory, business consultancy, bookkeeping, Tax Compliance, payroll, monthly financial reporting and other advisory services.
Our secure system protects your financial data, making due diligence simple and hassle-free. For reliable Due Diligence services in Dubai, call +971 503372712 or email [email protected].
