What Activities Does M&A Due Diligence Involve — and What Makes the UAE Context Different?

Why M&A Due Diligence Is More Than a Document Request List

M&A due diligence is typically described as an information-gathering exercise — a list of documents the buyer requests, reviews, and checks off. That description understates what well-executed due diligence actually involves. Behind the document list sits a series of specific investigative activities, each designed to answer a different question about the target business: Is the financial information accurate? Are the key contracts transferable? What regulatory obligations will the buyer inherit? Are there legal exposures the seller hasn’t disclosed?

In the UAE context, M&A due diligence since 2023 involves a regulatory dimension that didn’t previously exist — a target company’s Corporate Tax history, VAT compliance record, and Qualifying Free Zone Person status all need to be independently assessed, because a buyer in a share purchase transaction inherits the seller’s full regulatory history, including any undisclosed FTA liabilities. Understanding what each due diligence workstream actually does — and what UAE-specific questions it needs to answer — is the foundation of a properly structured M&A process.

Financial Due Diligence — Verifying the Numbers Behind the Deal

Financial due diligence is concerned not just with whether the target’s financial statements are accurate, but with understanding what the numbers actually mean for the deal economics. The specific activities it involves include:

• Historical financial statement review — examining the last three to five years of audited accounts (and management accounts for the current period) for accuracy, consistency, and any accounting policy changes that affect the comparability of results across periods
• Quality of earnings analysis — identifying whether reported EBITDA reflects genuine, recurring business performance or has been inflated by one-off items, capitalised expenses that should be expensed, or revenue pulled forward from future periods
• Working capital assessment — determining the normalised level of working capital in the business, confirming the target is not artificially improving its cash position in the run-up to a sale, and establishing the working capital target for the completion accounts mechanism
• Net debt analysis — identifying every form of indebtedness, including off-balance sheet liabilities, contingent obligations, finance leases, shareholder loans, and any obligations that economic substance requires to be treated as debt even if not formally classified as such
• Cash flow verification — confirming that reported earnings translate into actual cash generation and identifying any structural differences between accounting profit and operating cash flow

For UAE targets, financial due diligence must also verify that the financial statements are IFRS-compliant — the mandatory accounting standard in the UAE — and that they form a reliable foundation for the Corporate Tax calculations the buyer will inherit if acquiring shares rather than assets.

Tax Due Diligence — The Most Consequential Workstream Since 2023

Tax due diligence in UAE M&A transactions carries considerably more weight since Corporate Tax took effect in June 2023. In a share purchase transaction, the buyer acquires the target company’s entire tax history — including any undisclosed FTA liabilities, unfiled returns, incorrectly calculated VAT, accumulated penalties, and transfer pricing positions that may not withstand FTA scrutiny. Specific tax due diligence activities include:

Corporate Tax

• Confirming registration with the FTA and reviewing all filed Corporate Tax returns
• Assessing taxable income calculations for correctness — including the treatment of non-deductible expenditures, exempt income, and related-party transactions
• For free zone targets, analysing the basis for any claimed Qualifying Free Zone Person status — is the 0% rate properly supported, and will that support survive the change of ownership?
• Identifying any open FTA assessments, audit notifications, or unresolved correspondence
• Reviewing transfer pricing documentation for all related-party transactions, and assessing whether the positions taken would withstand FTA challenge

VAT

• Confirming VAT registration status and reviewing all filed VAT returns for the last five years (the FTA’s standard audit window)
• Verifying that output VAT has been correctly charged on all taxable supplies and that no supplies have been incorrectly zero-rated or exempted
• Reviewing input VAT recovery positions for correctness and confirming that claimed amounts are supported by valid tax invoices
• Identifying any voluntary disclosures, FTA audits, or assessments and their outcomes

Deal Structure Tax Analysis

Whether the transaction is structured as a share purchase or asset purchase carries materially different tax consequences under Federal Decree-Law No. 47 of 2022. In a share purchase, the buyer inherits the target company’s tax history as described above. In an asset purchase, the buyer acquires the assets but not the historic tax liabilities — at the cost of losing any step-up in the tax base of the assets and potentially triggering VAT on the asset transfer. Tax due diligence informs which structure is more appropriate given the specific facts of the target business.

Legal Due Diligence — What the Corporate and Contractual Foundation Looks Like

Legal due diligence examines the legal structure underpinning the target business — confirming that it is properly constituted, that its ownership is as represented, and that its key contracts and licences will survive or can be transferred through the transaction. Key activities include:

Corporate Structure and Ownership

• Reviewing the memorandum and articles of association and all amendments for restrictions on share transfers, pre-emption rights, and any provisions that affect the buyer’s ability to acquire control
• Verifying the shareholder register against the represented ownership structure, including confirmation of Ultimate Beneficial Ownership under Cabinet Decision No. 58 of 2020
• Reviewing all board minutes and shareholder resolutions for the last three to five years for undisclosed decisions, obligations, or transactions
• Confirming that the acquisition does not require prior approval from free zone authorities, regulators, or other parties with consent rights

Licences and Regulatory Approvals

• Confirming validity and renewal status of the trade licence, free zone licence, and any sector-specific regulatory approvals
• Identifying whether any licences are personal to the current shareholder or director and would need to be reissued post-acquisition
• Assessing whether the acquisition triggers any notification or approval requirements under UAE competition law — Federal Law No. 4 of 2012 and its 2023 amendments require notification above specified market concentration thresholds

Material Contracts

A systematic review of all material customer contracts, supplier agreements, lease agreements, and financing arrangements with particular attention to:

• Change-of-control clauses — provisions that allow counterparties to terminate or renegotiate on a change of ownership. These are among the most commercially significant findings in M&A due diligence, since a key customer contract that terminates on completion of the acquisition can fundamentally change the deal economics
• Assignment restrictions — particularly in lease agreements, which in the UAE frequently require landlord consent to any assignment or subletting that accompanies an ownership change
• Revenue concentration — the extent to which revenue is dependent on a small number of customers, each of which represents renewal and retention risk post-acquisition

Intellectual Property Due Diligence

For businesses whose value is partly or substantially embedded in intangible assets — trademarks, software, proprietary processes, customer data, or creative content — IP due diligence verifies that the target actually owns or has valid rights to use these assets. Key activities include:

• Verifying registration and renewal status of all trademarks in the UAE and other jurisdictions where the business operates, against the UAE Trademark Law under Federal Decree-Law No. 36 of 2021
• Confirming that software, databases, and creative works are either owned by the target or properly licensed, and that open-source software has not been used in ways that affect the target’s IP ownership
• Reviewing confidentiality and non-disclosure agreements with employees and contractors to confirm that work product created for the business is properly assigned to it
• Identifying any current or threatened IP disputes — infringement claims, opposition proceedings, or licensing disputes that affect the value or availability of the IP

Employee and HR Due Diligence

UAE HR due diligence carries specific dimensions that international buyers unfamiliar with the UAE framework frequently underestimate:

• End-of-service gratuity liability — the accrued gratuity for all employees under Federal Decree-Law No. 33 of 2021 represents a real liability that either the seller will settle or the buyer will inherit. For a business with long-tenured staff, this can be a material figure — 21 days of basic salary per year for the first five years, 30 days per year beyond that, capped at two years of basic salary per employee
• Employment contract compliance — confirming all contracts have been converted to fixed-term format as required by the 2021 Labour Law by the February 2023 deadline
• WPS compliance — reviewing WPS payment history and confirming no outstanding MoHRE disputes, violations, or work permit freezes
• Key person dependency — identifying the employees whose departure would most affect the business’s value, and assessing what retention arrangements are in place or need to be structured as part of the deal
• Emirati minimum wage compliance — confirming UAE national employees are paid the AED 6,000 per month minimum effective January 2026

Litigation and Dispute Due Diligence

A systematic review of all current, pending, and threatened proceedings involving the target business, including:

• Active court cases and arbitration proceedings, with assessment of the financial exposure if the target loses
• Settled disputes and the terms of settlement — settlements that impose ongoing obligations or non-compete restrictions on the business are relevant to the buyer even after the dispute itself is resolved
• Regulatory investigations and any history of regulatory sanctions, fines, or enforcement actions
• Insurance coverage available against claims, and any gaps between potential exposure and coverage limits

Environmental and Regulatory Compliance Due Diligence

For businesses with physical operations — manufacturing, processing, construction, or property — environmental compliance review assesses whether the business has any unresolved environmental obligations, regulatory violations, or remediation liabilities. In the UAE context this also includes compliance with sector-specific regulations: healthcare businesses require DHA or MOH approval, financial services require CBUAE or SCA authorisation, and businesses in certain DDA-regulated free zones are subject to additional licensing requirements under DDA Circular No. 421 of 2022.

The Disclosure Schedule — How Due Diligence and Deal Documentation Connect

M&A transactions include a disclosure schedule — a formal document prepared by the seller that identifies specific exceptions to the representations and warranties the seller gives in the Sale and Purchase Agreement. The disclosure schedule connects directly to the due diligence process: findings identified during due diligence may be disclosed in the schedule to limit the seller’s warranty liability, while findings not disclosed in the schedule may give rise to warranty claims after completion if they subsequently cause the buyer loss.

Preparing the disclosure schedule carefully and completely is in the seller’s interest — an incomplete schedule leaves the seller exposed to post-completion claims for anything material that was not disclosed. The buyer’s due diligence team reviews the disclosure schedule against their findings to identify any gaps between what the seller has disclosed and what the due diligence has surfaced independently.

Frequently Asked Questions (FAQs)

What is the most important due diligence workstream in a UAE M&A transaction?

Tax due diligence has become among the most critical workstreams since Corporate Tax took effect in June 2023. In a share purchase, the buyer inherits the target’s complete tax history — including any undisclosed FTA liabilities, unfiled returns, and transfer pricing exposures. This was not a consideration in UAE M&A transactions before 2023.

What is a change-of-control clause and why does it matter in M&A due diligence?

A change-of-control clause is a provision in a contract that allows the counterparty to terminate or renegotiate the agreement when ownership of one of the parties changes. Where a key customer contract contains such a clause, an acquisition may trigger its operation — potentially costing the buyer the very revenue stream it was paying for. Identifying these clauses during due diligence is one of the most commercially significant activities in contract review.

How does the choice between share purchase and asset purchase affect due diligence?

In a share purchase, the buyer inherits the target company’s entire history — including tax liabilities, litigation exposure, and employment obligations. Due diligence must therefore examine these historical exposures thoroughly. In an asset purchase, the buyer acquires specific assets without assuming the company’s history, which reduces historical liability exposure but may create different issues around VAT on the asset transfer, consent to assignment of contracts, and the loss of the entity’s existing regulatory licences.

What UAE-specific issues arise in employee due diligence?

UAE employee due diligence must specifically assess end-of-service gratuity accrual (a statutory liability that the buyer inherits or the seller must settle), WPS compliance history, employment contract conversion to fixed-term format as required by the 2021 Labour Law, and Emirati minimum wage compliance (AED 6,000/month from January 2026).

Does a UAE M&A transaction require competition law notification?

Potentially. Federal Law No. 4 of 2012 on Competition (as amended in 2023) requires notification of transactions above specified market share or revenue thresholds before they can be completed. Whether a specific transaction requires notification is one of the early regulatory questions due diligence should answer.

How Farahat & Co. Can Help

Farahat & Co. provides M&A due diligence services to buyers and sellers across the UAE — covering financial analysis, Corporate Tax and VAT history review, QFZP status assessment, transfer pricing review, and coordination with legal workstreams. Our team has experience across mainland and free zone transactions and brings current knowledge of the UAE’s evolving tax and regulatory framework to every engagement.

Contact Farahat & Co. today to discuss your M&A due diligence requirements.