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  • Writer's pictureAkram Cheik - Lawyer

Assessing the value of a Dubai company before acquiring it.

Investing in a company in Dubai can be an attractive opportunity for many investors. However, it is important not to rely solely on the term and validity of the Trade License when assessing the value of a company. It is crucial to carry out a full valuation of the company before investing to minimize risk and maximize potential gains.

This assessment must notably take into account the relationship between the bank and the company as well as all the contingent liabilities of the company. In this article, we will explore the importance of carrying out a comprehensive assessment of the value of a company in Dubai before investing, in order to maximize gains and minimize risks. Thus, in several contexts it may be interesting to acquire a company that already exists.

Several points are therefore to be assessed, however first of all it is important to make an assessment of the company (I) before checking the administrative situation of a company (II)

I – Methods of valuation of a company in Dubai

A - Analysis of the state of the company's finances

Financial statement analysis involves examining a company's financial statements (balance sheet, income statement, cash flow statement, etc.) to assess its financial condition and performance. There are several methods to perform this analysis, here are some of the most common methods:

Vertical Analysis: This method consists of analyzing the financial statements in percentage with respect to a reference variable. For example, balance sheet items can be analyzed as a percentage of total assets or liabilities.

Horizontal Analysis: This method involves analyzing changes in financial statement line items from year to year. We can thus see the evolution of the financial situation and the performance of the company.

Financial ratios: This method involves calculating financial ratios such as liquidity ratio, debt ratio, profitability ratio, etc. These ratios make it possible to compare the company's performance with other companies in the same sector.

Cash Analysis: This method involves analyzing the company's incoming and outgoing cash flows to assess its ability to generate cash and repay debt.

With regard to the legislation of the United Arab Emirates, the Emirati Commercial Code (Commercial Companies Law) requires companies to keep accounting and financial records in accordance with the accounting standards issued by the competent authorities. Companies must also produce annual financial statements and subject them to independent verification by an approved auditor. There are also other specific accounting regulations and standards, including International Financial Reporting Standards (IFRS), which may apply depending on the size of the company and its industry. It is now imperative to be accompanied by an account due to the corporate tax reform in force on June 1, 2023.

B – Analysis of assets and liabilities of companies in Dubai

So, the analysis of assets and liabilities of Dubai companies is done by looking at the balance sheet of the company. A company's balance sheet is a financial statement that shows the assets, liabilities and equity of the company as of a given date.

Hence, asset analysis involves looking at the different categories of assets of the company such as fixed assets, inventory, receivables, cash, etc. The objective is to understand the nature, quality and value of the company's assets, as well as their evolution over time. For example, inventory analysis helps to know whether the company has a high or low level of inventory, whether it is obsolete or not, etc.

Therefore, the analysis of liabilities consists of examining the different categories of liabilities of the company, such as debts, provisions, taxes to be paid, etc. The objective is to understand the nature and quality of the company's liabilities, as well as their evolution over time. For example, debt analysis helps to know if the company is highly indebted or not, if the debts are short or long term, if the interest is high, etc.

In addition, it is important to take into account the accounting and tax standards applicable in Dubai to analyze the assets and liabilities of the company. Local regulatory authorities may require compliance with specific accounting standards such as International Financial Reporting Standards (IFRS).

In sum, analyzing the assets and liabilities of Dubai companies is a crucial step in evaluating a company before investing or buying it. It makes it possible to understand the financial situation of the company and to identify the risks and opportunities.

Finally, another method could consist of a comparative study of the company with other similar companies in the same sector, however this would require obtaining data concerning competing companies, this data is not open source in the United Arab Emirates.

II – Administrative checks before buying a company in Dubai

A - Verification of the Trade License

First of all, the Trade License is an official document issued by the Dubai authorities which allows a company to carry out its activities. Thus, in Dubai, this document is valid for one year and must therefore be renewed at the same starting purchase price. A detail that is important because the price of a trade license can be expensive depending on the activity. Therefore, it is advisable to be careful about its renewal date because the cost could thus be integrated into the evaluation.

In addition to the financial aspect, it is necessary to make a legal check as to the corporate purpose of the company and the activity actually practiced. Indeed, the corporate purpose must correspond to the risk of being subject to sanctions. In addition, some trade licenses will have to be modified such as the addition of activity which can also be expensive because such an addition can cost the price of a trade license which could also be integrated into the evaluation .

Finally, check that the activity complies with local regulations: It is important to ensure that the business complies with all local regulations regarding trade, labor, taxation and other relevant areas. This can help avoid long-term legal and financial problems.

B - Verification of the company's relationship with the bank or debtors

In order to make a fair assessment, it is necessary to check whether nothing escapes the company's liabilities, as this would have the consequences of future surprises that are rather restrictive for the acquirer.

Therefore, it is important to check the situation of the company's bank to ensure that its accounts are in order and that it is not subject to bank seizures or unpaid debts. It is also important to check if the company has strong banking relationships to ensure some financial stability. In addition, it is possible that a company has several bank accounts, it is also advisable to check on the trade license the person or persons authorized to carry out transactions on behalf of the company.

Always in the idea of checking the liabilities of the company, it is important to check if the company has debts to third parties and to know their nature, their amount and their due date. This can help assess the risks of acquiring the business and negotiate the terms of the purchase.

To be more complete, it will be necessary to check in the near future if the company is up to date with its tax contributions with the arrival of corporation tax, however, it is already possible to check if the company is registered with the tax department for 5% VAT, some delays in registering this obligation may result in fines.

Akram Cheik, Lawyer

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