➤ Introduction

Every seller goes to market believing their business is more ready than it is. That belief is not arrogance — it is a natural consequence of operating a company from the inside. From the inside, the gaps are invisible. From a buyer's side of the table, they are the first thing a due diligence team looks for — and often the earliest due diligence red flags that influence valuation and deal terms.

The UAE M&A market recorded 884 deals worth US$106.1 billion in 2025, according to EY's MENA M&A Insights 2025 report, with the UAE attracting the largest share of both domestic and inbound deal activity in the region. With this volume of capital being deployed, institutional and strategic buyers are running increasingly rigorous due diligence. Advisors have seen every variation of the same problems — and they know exactly where to look.

The five issues below are not hypothetical. They are the red flags that appear, in some form, in the majority of UAE due diligence exercises. More importantly, every one of them is fixable — but only if a seller identifies and addresses them before entering exclusivity, not after. By the time a buyer has found the problem, the negotiating leverage has already shifted.

▸  WHAT BUYERS FIND

In the UAE, where a significant proportion of target businesses are family-owned or founder-led, reported EBITDA routinely overstates the earnings available to a new owner. Buyers conducting financial due diligence will invariably find related-party transactions recorded at non-arm's-length pricing — property leased from a related entity at below-market rent, management fees paid to a family holding company, or services provided by affiliated businesses without a commercial basis.

Beyond related parties, buyers strip out non-recurring revenues — one-off government contracts, exceptional insurance recoveries, or booked gains from asset disposals — that sellers have left in the operating line. Owner compensation is another consistent adjustment: a founder who takes a below-market salary to inflate operating profit, or one who charges personal expenses through the business. The result is a quality of earnings (QoE) gap — the difference between reported EBITDA and the sustainable EBITDA a buyer will underwrite.

▸  HOW SELLERS CAN FIX IT BEFORE THE DEAL STARTS

Commission a sell-side Quality of Earnings (QoE) analysis at least three to six months before going to market. A QoE exercise identifies and quantifies every normalisation adjustment a buyer will make — related-party transactions, owner add-backs, one-off items, and revenue recognition inconsistencies. Sellers who produce their own QoE report control the narrative. Sellers who wait for a buyer's report find themselves defending a number rather than presenting one.

Link all normalisation adjustments to underlying documents — invoices, contracts, bank statements. A clean, evidenced normalisation schedule is the difference between a price negotiation and a price reduction.

▸  WHAT BUYERS FIND

Practitioners conducting due diligence on UAE businesses report that gratuity liabilities appear 30 to 50% lower on the balance sheet than the actual accrued obligation — making this one of the most consistently mispriced liabilities in UAE M&A transactions.

Under UAE labour law (Federal Decree-Law No. 33 of 2021), end-of-service gratuity is calculated on the employee's basic salary only — not total salary. The formula provides 21 days of basic salary per year for the first five years of service, and 30 days per year for each subsequent year, capped at two years' total wages. The most common calculation error is using total salary — which includes housing, transport, and other allowances — as the base. This produces a provision that appears adequate but systematically understates the true liability.

In a share purchase — the dominant deal structure for UAE business acquisitions — this liability transfers automatically to the buyer. Every dirham of under-provisioning reduces the buyer's effective return. And unlike a tax contingency, gratuity is not a probability — it is a mathematical certainty tied to tenure and basic salary.

▸  HOW SELLERS CAN FIX IT BEFORE THE DEAL STARTS

Before going to market, calculate the accrued gratuity liability independently from current payroll data, using basic salary figures and verified service dates for every employee. Do not rely on the existing balance sheet provision. Reconcile the independently calculated figure against the provision on the books and correct the shortfall.

Document the calculation methodology — including the definition of basic salary used, the treatment of part-years, and the handling of any employees enrolled in the UAE Savings Scheme under Cabinet Resolution No. 96 of 2023. A reconciled, methodology-documented gratuity schedule presented in the data room removes a standard buyer negotiation lever before the conversation starts.

▸  WHAT BUYERS FIND

Since the UAE's corporate tax came into force (Federal Decree-Law No. 47 of 2022), any acquirer's due diligence team will spend significant time on a target's tax compliance position. For many UAE businesses, the tax file has multiple unresolved dimensions simultaneously.

VAT audit windows remain open from 2021 through 2025. The Federal Tax Authority (FTA) can audit VAT periods going back five years from the end of each tax period. Transactions filed before 2023 using revenue recognition approaches that have since been revised, or input tax claims that now appear aggressive, remain exposures until those windows close.

Corporate Tax — levied at 9% on taxable income above AED 375,000 — is now in its second and third filing years. Many UAE businesses implemented CT registration without fully assessing which income streams are taxable, which elections to make, and whether their current entity structure is optimal. The free zone qualifying income problem is particularly acute: a company that claims 0% tax on qualifying income as a Qualifying Free Zone Person must meet continuous activity and substance requirements. These conditions are not self-certifying, and buyers will verify them independently. When the status fails post-acquisition, the 9% rate applies to the entire taxable income, not merely the non-qualifying portion.

Transfer pricing adds a further dimension. Related-party transactions must be documented at arm's length, and businesses that have operated informally within corporate groups without transfer pricing documentation are routinely flagged.

▸  HOW SELLERS CAN FIX IT BEFORE THE DEAL STARTS

Conduct a tax health check across three dimensions before going to market: VAT (open windows and any positions that could be reassessed), Corporate Tax (registration accuracy, elections made, qualifying income classification), and transfer pricing (related-party documentation adequacy).

For free zone entities, obtain a formal assessment of Qualifying Free Zone Person eligibility — not a management assumption. If the status is vulnerable, address it or disclose it with a clear commercial explanation. A buyer who finds this risk independently will apply a price reduction; a seller who discloses it proactively controls the remedy.

▸  WHAT BUYERS FIND

This is the red flag that most often surprises sellers, because it is hidden in documents the business relies on every day without thinking of them as risk instruments. In a UAE acquisition, a change of control clause in a material contract gives the counterparty the right — sometimes the obligation — to terminate or renegotiate upon a transfer of ownership.

The exposure is not theoretical. Bank facilities in the UAE almost universally require lender consent upon a change of control. Key customer contracts — particularly those with government entities, multinational corporations, or anchor tenants — frequently carry change of control provisions. Supplier agreements, major lease arrangements, and franchise or distribution agreements may carry similar terms.

From a buyer's perspective, revenue secured by contracts that can terminate 30 days after closing is worth materially less than revenue locked into long-term agreements. A business with AED 20 million in annual revenue, where AED 8 million sits under contracts with change of control provisions and no counter-party relationship in place, is not the same business as its headline P&L suggests. Deals have been re-traded, and sometimes collapsed, on this basis.

▸  HOW SELLERS CAN FIX IT BEFORE THE DEAL STARTS

Build a change of control matrix before going to market: systematically review every material contract — customer agreements, supplier terms, banking facilities, leases, and licences — and identify whether it contains a change of control clause, what it permits, and whether counterparty consent is required.

For material contracts where the risk is real, initiate relationship conversations early. A counterparty who has been engaged proactively about continuity is far more likely to provide a consent or waiver letter than one who learns about an acquisition through legal notice. Secure as many consents as possible before exclusivity — the goal is to present a buyer with a business whose revenue is contractually transferable, not one whose revenue requires a post-closing assumption.

▸  WHAT BUYERS FIND

The UAE has significantly strengthened its beneficial ownership (UBO) and AML compliance requirements over the past three years. Under Cabinet Decision No. 109 of 2023, all UAE legal entities are required to maintain an accurate and current UBO register — disclosing all natural persons who ultimately own or control more than 25% of the company, or who exercise effective control through other means. Ministry of Economy UBO audits are now routine, and discrepancies between the registered UBO file and the actual ownership structure can result in trade licence suspension.

From a due diligence perspective, a buyer acquiring a company with unresolved UBO issues, incomplete corporate registers, or AML non-compliance inherits those regulatory exposures post-closing. In H1 2025 alone, DNFBP inspections resulted in over 1,063 violations and more than AED 42 million in AML-related fines across the UAE — a figure that demonstrates the enforcement environment any acquisition operates in.

Buyers representing institutional capital, international strategic investors, or entities operating in regulated sectors will subject UBO structures and AML compliance positions to intensive scrutiny. Layered ownership structures, nominee arrangements, or any opacity in the beneficial ownership chain will generate either a significant price discount or a deal condition requiring resolution before closing.

▸  HOW SELLERS CAN FIX IT BEFORE THE DEAL STARTS

Conduct a full UBO audit before going to market. Verify that the company's UBO register is accurate, current, and consistent with all relevant corporate documents. For complex group structures, map the beneficial ownership chain clearly — with supporting documentation — and ensure the register filed with the relevant authority matches.

Complete a regulatory compliance health check covering AML obligations under Federal Decree-Law No. 10 of 2025 and Cabinet Resolution No. 134 of 2025 where applicable. If the business is a DNFBP, verify GoAML registration, the currency of the enterprise-wide risk assessment, and CDD adequacy. Present buyers with a clear, documented compliance posture, not an ownership structure they need to unpick themselves.

➤ Conclusion

The buyer's due diligence team will find what you did not fix. That is not a pessimistic statement — it is a description of the process. Experienced UAE M&A advisors have reviewed hundreds of data rooms, and the same gaps appear with enough regularity to be treated as predictable rather than exceptional.

The businesses that transact at the best prices are not always the ones with the best underlying performance. They are the ones whose sellers arrived at the table with a clean data room, a reconciled set of financials, and documented answers to every question a buyer was going to ask. That preparation does not happen during exclusivity. It requires three to six months of structured sell-side work before a business goes to market.

For UAE sellers, the period before marketing is not a waiting phase. It is the most valuable part of the transaction.

➤ Frequently Asked Questions

Q1. What is vendor due diligence (VDD) and why should UAE sellers commission it?

Vendor due diligence is a sell-side review commissioned by the seller — not the buyer — that applies buy-side scrutiny to the business before it goes to market. The seller controls the scope, timeline, and output. A VDD report identifies the issues buyers will find, allows the seller to address them in advance, and produces an independent factual base that reduces deal friction, compresses the due diligence phase, and supports the seller's valuation position. For UAE sellers preparing for institutional, private equity, or strategic buyers, VDD is one of the highest-return pre-transaction investments available.

Q2. How is employee gratuity calculated in the UAE, and why is under-provisioning so common?

Under Federal Decree-Law No. 33 of 2021, UAE end-of-service gratuity is calculated on basic salary only — excluding housing, transport, and other allowances. The formula provides 21 days of basic salary per completed year for the first five years of service, and 30 days per year thereafter, with a cap equal to two years' total wages. Under-provisioning is common because many businesses calculate the liability using total compensation rather than basic salary, or because the provision has not been reconciled to actual payroll data for several years. In a share purchase, any shortfall transfers to the acquirer directly, making this a price-adjustment item in almost every deal where it is found.

Q3. What makes free zone corporate tax status a due diligence risk in UAE M&A?

A Qualifying Free Zone Person in the UAE is entitled to a 0% corporate tax rate on qualifying income — but that status must be actively maintained. It requires meeting specific substance requirements in the free zone, ensuring that qualifying income is properly defined and that non-qualifying income is separated and taxed at the standard 9% rate. Buyers will verify free zone eligibility independently. If the status cannot be confirmed, the buyer will price the deal using a 9% post-tax DCF model rather than a 0% assumption — which can materially reduce the headline valuation. Sellers should obtain a formal assessment of their qualifying status before going to market.

Q4. How should a UAE seller address UBO (beneficial ownership) requirements before a transaction?

UAE law requires all entities to maintain an accurate UBO register reflecting any natural person who owns or controls more than 25% of the company, or who exercises effective control by other means. Before a transaction, the seller should audit the current UBO register for accuracy, ensure it matches all corporate documents, and update the filing with the relevant authority if required. For complex group structures or entities with nominee arrangements, the ownership chain should be documented clearly and verified against the constitutional documents. Buyers — particularly institutional or cross-border acquirers — will not proceed with a transaction where the beneficial ownership structure cannot be independently verified.

Q5. How far back can the UAE's Federal Tax Authority audit VAT returns from a target company?

The FTA can generally audit VAT returns going back five years from the end of each tax period. For a business preparing for sale in 2025 or 2026, VAT periods from as early as 2020 or 2021 may therefore still be subject to FTA review. This matters in due diligence because any reassessment of VAT positions covering those open periods would create a contingent liability for the acquirer in a share purchase. A pre-transaction VAT compliance review covering open audit windows is an essential component of tax due diligence readiness for any UAE seller.

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