Due Diligence Audit Checklist for M&A Deals in the UAE

A merger or acquisition can create significant opportunities for business owners, investors, and companies entering new markets. However, the value of an M&A transaction depends heavily on the accuracy of the information available before the deal is completed. A due diligence audit checklist UAE can help buyers systematically examine the target company’s financial position, operations, liabilities, tax compliance, contracts, assets, and potential risks before committing to the transaction.

In the UAE, due diligence can be particularly important for small and medium-sized businesses where accounting practices, documentation, internal controls, and management processes may vary significantly between companies. A detailed financial due diligence audit can identify issues that may not be immediately visible from the company’s financial statements or management representations.

This guide provides a practical checklist for conducting due diligence in UAE M&A transactions, with particular attention to financial and operational matters. It is intended as a working reference for business owners, investors, acquirers, and professional advisers.

What Is Due Diligence in an M&A Transaction?

Due diligence is the process of investigating and evaluating a target business before completing a merger, acquisition, investment, or other significant transaction. The objective is to verify the information provided by the target company and identify financial, operational, tax, commercial, and other risks that could affect the transaction.

An M&A due diligence exercise typically involves reviewing historical financial information, assets and liabilities, revenue sources, customers, suppliers, contracts, employees, tax obligations, operational processes, and internal controls.

A due diligence audit is not simply an examination of whether the financial statements are correctly prepared. It also considers whether the reported financial performance is sustainable, whether undisclosed obligations exist, and whether the business has sufficient systems and controls to support its future operations.

Check: Due Diligence Audit Services in Dubai, UAE

Why Is M&A Due Diligence Important in the UAE?

A buyer may rely on information supplied by the seller when determining the purchase price and negotiating transaction terms. If important information is incomplete or inaccurate, the buyer could acquire risks that were not reflected in the original valuation.

For example, a company may report strong profits while having significant overdue receivables, excessive dependence on one customer, unrecorded liabilities, weak inventory controls, or tax exposures. These issues could materially change the value of the business after acquisition.

A structured due diligence audit process helps the buyer:

• Verify the financial performance and financial position of the target.
• Identify undisclosed liabilities and contingent obligations.
• Assess the quality and sustainability of revenue and earnings.
• Evaluate working capital requirements.
• Identify tax and regulatory compliance risks.
• Assess the condition and ownership of assets.
• Evaluate operational efficiency and internal controls.
• Identify potential fraud, related-party transactions, and unusual accounting practices.
• Support negotiations over valuation, warranties, indemnities, and transaction terms.
• Reduce the likelihood of post-acquisition disputes.

Due Diligence Audit Checklist UAE

The following checklist can be used as a starting point for an M&A due diligence exercise. The exact scope should be adjusted according to the size, industry, legal structure, transaction type, and risk profile of the target company.

1. Corporate and Ownership Information

Before reviewing the financial performance of the target, establish who owns and controls the business and how it is legally structured.

• ☐ Obtain the current trade licence and relevant registration documents.
• ☐ Review the Memorandum of Association and other constitutional documents.
• ☐ Verify the current shareholders and ownership percentages.
• ☐ Review shareholder agreements and amendments.
• ☐ Confirm the beneficial ownership structure.
• ☐ Identify directors, managers, authorised signatories, and persons with significant control.
• ☐ Review previous changes in ownership or corporate structure.
• ☐ Check whether the company operates through mainland, free zone, or other regulated entities.
• ☐ Identify subsidiaries, branches, associated companies, and joint ventures.
• ☐ Check whether required licences and approvals are valid and current.

The corporate structure should be understood before financial conclusions are reached. A target may have subsidiaries, related entities, shareholder-controlled businesses, or intercompany arrangements that materially affect the financial statements.

2. Financial Statements and Accounting Records

Financial statements form a central part of financial due diligence. The reviewer should examine several years of historical information where available rather than relying solely on the most recent annual accounts.

• ☐ Obtain audited financial statements, where available.
• ☐ Obtain management accounts for the latest available period.
• ☐ Obtain trial balances and general ledgers.
• ☐ Review accounting policies and changes in accounting treatment.
• ☐ Compare management accounts with statutory financial statements.
• ☐ Analyse balance sheets, income statements, and cash flow statements.
• ☐ Investigate material fluctuations between reporting periods.
• ☐ Review unusual or one-off accounting entries.
• ☐ Assess whether financial information is supported by underlying records.
• ☐ Determine whether accounting records are complete and maintained consistently.

For UAE Corporate Tax purposes, taxable persons are expected to prepare and maintain financial statements and supporting records. The Federal Tax Authority states that records should support information reported in Corporate Tax filings, including records of transactions, assets, and liabilities. Relevant records generally need to be retained for at least seven years following the end of the relevant Tax Period.

Financial Due Diligence Checklist

3. Revenue Quality and Sustainability

Reported revenue does not necessarily represent sustainable revenue. A buyer should examine the source, timing, concentration, and quality of revenue before relying on historical turnover when valuing the business.

• ☐ Reconcile reported revenue to the general ledger and supporting sales records.
• ☐ Analyse revenue by customer, product, service, geography, and business segment.
• ☐ Identify the company’s largest customers.
• ☐ Measure customer concentration.
• ☐ Review recurring versus one-time revenue.
• ☐ Examine significant changes in revenue shortly before the transaction.
• ☐ Review sales returns, discounts, rebates, and credit notes.
• ☐ Examine revenue recognition policies.
• ☐ Review major customer contracts and renewal terms.
• ☐ Investigate unusually large transactions or year-end sales.

A business that generates a large proportion of its revenue from a small number of customers may carry greater post-acquisition risk than its headline revenue figure suggests. Similarly, revenue generated from temporary contracts or one-off projects may not be appropriate for projecting future earnings.

4. Accounts Receivable and Customer Collections

Accounts receivable should be tested to determine whether reported receivables are genuinely recoverable.

• ☐ Obtain an aged receivables report.
• ☐ Identify overdue customer balances.
• ☐ Review balances outstanding for extended periods.
• ☐ Test subsequent collections after the reporting date.
• ☐ Identify disputed invoices.
• ☐ Review credit notes issued after year-end.
• ☐ Assess the adequacy of bad debt provisions.
• ☐ Identify related-party receivables.
• ☐ Investigate unusually large customer balances.

Weak collections can make reported profits appear stronger than the company’s actual cash generation. A buyer should therefore examine both reported earnings and the conversion of earnings into cash.

5. Accounts Payable and Other Liabilities

The liability review should focus on identifying obligations that may not be immediately apparent from the balance sheet.

• ☐ Obtain an aged payables report.
• ☐ Reconcile supplier balances with the general ledger.
• ☐ Identify overdue supplier balances.
• ☐ Search for unrecorded liabilities.
• ☐ Review unpaid expenses and accruals.
• ☐ Examine employee-related liabilities.
• ☐ Review loans, overdrafts, and other financing arrangements.
• ☐ Identify guarantees and security arrangements.
• ☐ Review contingent liabilities.
• ☐ Check for litigation or claims that may create financial exposure.

6. Working Capital Assessment

Working capital can have a direct impact on the purchase price and the cash required to operate the acquired business. The buyer should determine whether the target’s normal working capital level is sustainable.

• ☐ Analyse historical working capital trends.
• ☐ Review accounts receivable days.
• ☐ Review inventory turnover and inventory days.
• ☐ Analyse accounts payable days.
• ☐ Identify unusual working capital movements before closing.
• ☐ Determine the normalised working capital requirement.
• ☐ Identify obsolete or slow-moving inventory.
• ☐ Assess whether working capital has been temporarily reduced or inflated.
• ☐ Consider the appropriate working capital adjustment mechanism for the transaction.

A target company may temporarily accelerate collections, delay payments, reduce inventory purchases, or otherwise change its working capital position before a transaction. Such actions can make the business appear financially stronger at closing than it is under normal operating conditions.

7. Cash Flow and Debt Review

• ☐ Reconcile reported profit to operating cash flow.
• ☐ Review bank statements and significant cash movements.
• ☐ Identify restricted cash.
• ☐ Review bank loans and financing agreements.
• ☐ Identify shareholder loans.
• ☐ Review interest-bearing liabilities.
• ☐ Check for undisclosed borrowing arrangements.
• ☐ Examine debt repayment schedules.
• ☐ Identify financial covenants and potential breaches.
• ☐ Assess net debt and debt-like items relevant to the transaction.

8. Fixed Assets and Other Business Assets

• ☐ Obtain a fixed asset register.
• ☐ Verify significant assets physically where appropriate.
• ☐ Confirm ownership of major assets.
• ☐ Review purchase documentation for material assets.
• ☐ Assess depreciation policies.
• ☐ Identify obsolete or impaired assets.
• ☐ Review leased assets and lease obligations.
• ☐ Identify assets pledged as security.
• ☐ Assess whether assets recorded in the accounts are actually used by the business.

Tax and Regulatory Due Diligence Checklist

9. Corporate Tax Compliance

UAE Corporate Tax compliance should form part of the financial due diligence process. The buyer should determine whether the target has properly assessed its Corporate Tax obligations and maintained the records necessary to support its tax position.

• ☐ Confirm Corporate Tax registration status.
• ☐ Review Corporate Tax returns and filings, where applicable.
• ☐ Review Corporate Tax calculations.
• ☐ Reconcile taxable income with the underlying financial statements.
• ☐ Review tax adjustments and supporting documentation.
• ☐ Identify outstanding tax liabilities.
• ☐ Check for tax penalties or disputes.
• ☐ Review tax positions involving related parties.
• ☐ Assess the treatment of losses and other relevant tax attributes.
• ☐ Review whether the target’s tax records are complete and adequately supported.

The FTA continues to publish and update Corporate Tax legislation, guides, and public clarifications. Due diligence should therefore consider the rules applicable to the target’s specific tax periods and business activities rather than relying on outdated tax assumptions.

10. VAT and Other Tax Obligations

• ☐ Confirm VAT registration status.
• ☐ Review VAT returns and payments.
• ☐ Reconcile VAT returns with accounting records.
• ☐ Review input and output VAT treatment.
• ☐ Identify outstanding VAT liabilities or refunds.
• ☐ Check for VAT assessments, penalties, or disputes.
• ☐ Review applicable Excise Tax obligations, where relevant.
• ☐ Examine tax treatment of major transactions.

11. Tax Records and Documentation

Missing documentation can create problems during a tax review or after an acquisition. The buyer should establish whether the target maintains sufficient evidence to support its tax filings and accounting positions.

The FTA has specifically emphasised the importance of maintaining records and documents that support Corporate Tax returns. The required records can vary according to the nature and complexity of the business.

Operational Due Diligence Checklist

12. Business Operations

Financial statements provide only part of the picture. Operational due diligence examines how the business actually generates revenue and delivers its products or services.

• ☐ Understand the company’s primary business activities.
• ☐ Map key operational processes.
• ☐ Identify critical suppliers and service providers.
• ☐ Review dependence on key customers.
• ☐ Assess dependence on key employees.
• ☐ Review production or service capacity.
• ☐ Assess operational bottlenecks.
• ☐ Identify major operational risks.
• ☐ Review technology and software used by the business.
• ☐ Assess whether operations can scale after acquisition.

13. Customer and Supplier Concentration

• ☐ Identify the top customers by revenue.
• ☐ Determine the percentage of revenue generated by major customers.
• ☐ Review customer retention and churn.
• ☐ Identify major suppliers.
• ☐ Determine dependence on individual suppliers.
• ☐ Review supplier contracts and pricing arrangements.
• ☐ Identify alternative suppliers where appropriate.
• ☐ Investigate significant changes in customer or supplier relationships.

14. Contracts and Commercial Commitments

• ☐ Review major customer agreements.
• ☐ Review significant supplier contracts.
• ☐ Identify long-term commitments.
• ☐ Identify termination clauses.
• ☐ Check for change-of-control provisions.
• ☐ Review exclusivity arrangements.
• ☐ Identify minimum purchase or sales commitments.
• ☐ Review guarantees and indemnities.
• ☐ Identify contracts that may require consent following the transaction.

15. Employees and Payroll

• ☐ Obtain an employee list and organisational structure.
• ☐ Review payroll records.
• ☐ Identify senior and key employees.
• ☐ Review employment contracts for key personnel.
• ☐ Check outstanding employee-related obligations.
• ☐ Review bonuses, commissions, and incentive arrangements.
• ☐ Identify significant employee disputes or claims.
• ☐ Assess dependence on founders or individual employees.

Internal Controls and Governance Checklist

16. Internal Financial Controls

• ☐ Review segregation of duties.
• ☐ Assess approval procedures for payments.
• ☐ Review bank reconciliation processes.
• ☐ Assess controls over sales and collections.
• ☐ Review purchasing and supplier approval controls.
• ☐ Assess inventory controls.
• ☐ Review access controls over accounting systems.
• ☐ Check whether management regularly reviews financial reports.
• ☐ Identify manual processes that create a significant risk of error.

Weak internal controls do not automatically mean that a business is unsuitable for acquisition. However, they may increase the cost and complexity of integration and may indicate a greater risk of financial misstatement, fraud, or operational inefficiency.

Common Red Flags Found During UAE SME Due Diligence

SMEs can have informal processes that work effectively while the original owners are actively involved. These processes may become a significant risk when ownership changes. Common red flags include:

• Large unexplained related-party balances: Amounts owed by shareholders, directors, or related companies may not have clear repayment terms.
• Weak documentation: Significant transactions may not be supported by adequate contracts, invoices, approvals, or other records.
• High customer concentration: A substantial proportion of revenue may depend on a small number of customers.
• Old receivables: Significant overdue balances may indicate that reported assets are not fully recoverable.
• Unrecorded liabilities: Expenses, supplier obligations, employee claims, or other liabilities may not be properly recorded.
• Unusual year-end transactions: Large transactions close to the reporting date may require additional investigation.
• Weak inventory controls: Inventory records may not correspond with physical stock.
• Inconsistent accounting practices: Changes in accounting treatment can make historical performance difficult to compare.
• Tax compliance gaps: Missing returns, incomplete records, unresolved assessments, or unsupported tax positions can create post-acquisition exposure.
• Founder dependence: The business may rely heavily on the owner for customers, suppliers, banking relationships, or operational decisions.
• Personal and business expenses mixed together: This can distort the company’s underlying profitability.
• Cash transactions without sufficient documentation: These may require additional testing to establish their business purpose and accounting treatment.

UAE-Specific Areas That May Require Additional Review

The scope of due diligence should reflect the target company’s legal structure and activities. Companies operating in different sectors or jurisdictions within the UAE may face different regulatory requirements.

Free Zone Businesses

For free zone entities, the due diligence team should verify the applicable free zone rules, licence conditions, ownership structure, and any regulatory requirements relevant to the company’s activities.

Where the business has activities potentially relevant to UAE Corporate Tax free zone provisions, the buyer should also examine the company’s tax position and supporting documentation. The FTA’s current Corporate Tax legislation includes specific rules and decisions concerning Qualifying Free Zone Persons and related compliance matters.

Economic Substance Considerations

Where applicable, the buyer should determine whether the target falls within the scope of Economic Substance Regulations and whether required notifications or reports have been submitted. UAE government guidance states that entities conducting relevant activities may be required to demonstrate adequate economic presence in the UAE and submit applicable filings.

Beneficial Ownership and Corporate Records

The buyer should verify the target’s ownership and control structure and ensure that corporate records accurately reflect the current shareholders and beneficial owners. This is particularly important where the target has multiple entities, nominee arrangements, holding structures, or related-party transactions.

Due Diligence Audit Process for an M&A Deal

A practical due diligence audit process can be divided into several stages.

Step 1: Define the Scope

Determine what needs to be reviewed based on the transaction size, industry, structure, acquisition strategy, and identified risks.

Step 2: Prepare the Information Request List

Prepare a structured request covering financial statements, ledgers, bank records, tax records, contracts, assets, liabilities, employees, customers, suppliers, and other relevant documents.

Step 3: Review the Information

Review the information provided by management and compare it against supporting documents. The objective is to identify inconsistencies, unusual transactions, missing records, and areas requiring additional testing.

Step 4: Perform Financial Analysis

Analyse revenue, profitability, cash flow, working capital, debt, liabilities, and other financial indicators. Normalise results where appropriate to distinguish recurring operating performance from one-off items.

Step 5: Investigate Red Flags

Red flags should be investigated rather than simply listed. Where a material issue is identified, the reviewer should determine its financial impact, likelihood, and potential effect on the transaction.

Step 6: Quantify the Financial Impact

Where possible, identified risks should be translated into financial terms. This may affect the valuation, purchase price, working capital adjustment, escrow arrangements, warranties, indemnities, or other transaction protections.

Step 7: Prepare the Due Diligence Report

The final report should clearly distinguish between confirmed findings, areas requiring further investigation, financial adjustments, and recommendations.

Step 8: Support Transaction Negotiations

The findings can then be considered by the buyer and its legal and financial advisers when negotiating the final transaction structure and contractual protections.

Generic Example: How Due Diligence Can Prevent an M&A Dispute

Consider a hypothetical UAE-based trading company that is being acquired by another business. The target reports strong annual revenue and consistent profitability, and the initial valuation is based largely on these figures.

During the financial due diligence review, the buyer’s advisers identify that a significant portion of the reported receivables has remained outstanding for an extended period. Further review shows that several customers have disputed invoices and that a portion of the receivables is unlikely to be collected.

The review also identifies a substantial shareholder-related balance that had not been clearly disclosed during the initial valuation discussions. In addition, the company’s working capital immediately before the proposed completion date is materially below its historical operating level.

Rather than discovering these matters after completion, the buyer and seller address them before signing the final transaction documents. The purchase price and working capital mechanism are revised, responsibility for certain liabilities is clarified, and appropriate contractual protections are negotiated.

This example illustrates why due diligence is more than a document review. By identifying issues before completion, the parties can allocate risks clearly and reduce the likelihood of disputes about undisclosed liabilities, financial performance, or the condition of the business after acquisition.

Final Due Diligence Checklist Before Closing an M&A Deal

Before completing the transaction, the buyer should confirm that the key findings from the due diligence exercise have been addressed.

• ☐ Financial statements have been reviewed.
• ☐ Revenue quality has been assessed.
• ☐ Accounts receivable have been tested for recoverability.
• ☐ Accounts payable and other liabilities have been reviewed.
• ☐ Working capital requirements have been assessed.
• ☐ Debt and debt-like items have been identified.
• ☐ Major assets and ownership have been verified.
• ☐ Corporate Tax compliance has been reviewed.
• ☐ VAT and other relevant tax obligations have been reviewed.
• ☐ Major customer and supplier contracts have been examined.
• ☐ Key employees and employment obligations have been considered.
• ☐ Related-party transactions have been identified.
• ☐ Internal controls have been assessed.
• ☐ Litigation and contingent liabilities have been considered.
• ☐ Material red flags have been investigated.
• ☐ Financial adjustments have been quantified.
• ☐ Key findings have been reflected in transaction negotiations.
• ☐ Appropriate warranties, indemnities, and other protections have been considered with legal advisers.

When Should You Engage a Due Diligence Auditor in the UAE?

Professional assistance should ideally be obtained before the buyer makes a final commitment to the transaction. An independent auditor or financial due diligence adviser can provide a structured review of the target’s financial information and help identify risks that may not be apparent to a buyer who is primarily focused on commercial opportunities.

This is particularly important where the target is an SME with limited financial reporting processes, significant owner involvement, complex related-party transactions, substantial cash activity, rapid growth, or incomplete historical documentation.

A professional due diligence audit can also help management understand the financial consequences of identified risks and provide a more reliable basis for transaction negotiations.

Conclusion

A well-structured due diligence audit checklist UAE gives buyers a practical framework for evaluating an acquisition before the transaction becomes difficult to reverse. Financial due diligence should go beyond reviewing revenue and profit. It should examine revenue quality, receivables, liabilities, working capital, cash flow, debt, assets, taxes, related-party transactions, and the reliability of the underlying accounting records.

Operational and regulatory reviews are equally important because financial performance can be affected by customer concentration, supplier dependence, key employees, contracts, internal controls, licensing requirements, and compliance obligations.

For UAE M&A transactions, early identification of financial and operational risks allows buyers and sellers to address issues before completion rather than dealing with unexpected liabilities or disputes after the acquisition. A comprehensive due diligence exercise can therefore support better valuation decisions, stronger transaction terms, and a smoother post-acquisition transition.