Errors in Valuation During the Acquisition of a Company

In the United Arab Emirates (UAE), the mergers and acquisitions market is highly dynamic but also vulnerable to fraud and irregularities. Acquiring a company without adequate Due Diligence can expose investors to financial, legal, and operational risks. Here are the most common frauds and how to avoid them. 1. Manipulation of Financial Statements and Data

  • Some sellers inflate revenues or hide liabilities to make the company appear more profitable than it actually is.
  • Fake invoices, hidden debts, and overestimations of assets are common methods to manipulate financial statements.

    How to protect yourself:
  • Conduct an independent audit of the company's financial statements for the last 3-5 years.
  • Verify bank accounts and compare financial statements with actual cash flows.

2. False Ownership and Licensing Issues

  • In some cases, sellers falsely claim to own 100% of the company, when in reality they operate with non-compliant legal structures or hidden partners.
  • Other companies sell without having valid or updated business licenses.

    How to protect yourself:
  • Verify the business license through the Dubai Economic Department (DED) or the relevant Free Zone Authority.
  • Check actual ownership and the corporate structure through official registers.

3. Legal Disputes and Hidden Liabilities

  • The company for sale may have pending legal cases, government fines, or undisclosed contractual violations.
  • These issues can become liabilities for the new buyer after the acquisition.

    How to protect yourself:
  • Conduct thorough legal Due Diligence to check for disputes.
  • Consult a local lawyer to review existing contracts and legal risks.

4. Dependence on a Single Customer or Supplier

  • Some companies base their business on a single key customer or supplier, making them extremely vulnerable to sudden changes.
  • After the sale, the key customer may not renew the contract, causing a financial crisis.

    How to protect yourself    :
  • Analyze the diversification of the customer base and the stability of contracts with suppliers.
  • Include minimum revenue guarantee clauses in the sales contract.

5. Overestimation of Company Value

  • Sellers may exaggerate growth prospects, presenting unrealistic financial projections or altered market data.
  • Some try to sell a struggling company while hiding signs of decline.

    How to protect yourself    :
  • Apply independent valuation methods, such as Discounted Cash Flow (DCF) and EBITDA multiples.
  • Study the relevant industry to verify the consistency of growth projections.

6. False Partnerships and Residency Permits (Visa Scam)

  • Some sellers promise Golden Visas or other residency benefits as part of the acquisition, without having the authority to do so.
  • Some local partnerships are merely facades, with no real operational involvement from the Emirati partner.

    How to protect yourself    :
  • Always verify with the authorities if the purchase of the company entails residency rights.
  • Ensure that local partners have active and documented roles in the company.

Conclusion Acquiring a company in the UAE can be a strategic opportunity, but without accurate Due Diligence, one risks falling victim to fraud and serious financial or legal issues. Collaborating with experienced legal and financial advisors is essential to ensure transparency, compliance, and investment security.