When a buyer reads the accounts of a UAE owner-operated business, the item that most often goes missing is the one that costs the most to ignore: end of service gratuity. It is a liability that grows every month an employee stays, it is rarely funded, and in many small companies it does not appear on the balance sheet at all. A seller who has never been asked about it will quote a price as if it did not exist. A buyer who has been burned once will not. This guide explains how gratuity works as a pricing item, how we compute it, how it moves through a deal, and why we deal with it before a business goes to market and not after an offer is signed.
Why gratuity is a price issue and not a footnote
End of service gratuity is a statutory entitlement that accrues to employees as they complete service. The exact formula, the treatment of different contract types and the position in each free zone are matters for counsel and we do not improvise them. What matters for pricing is the shape of the liability. It is calculated from basic salary and years of service, it is owed when employment ends, and it belongs to the employer. In a share sale the employer does not change, so the liability does not change either. It stays inside the company and passes to the new owner on the day of completion.
That is the whole problem. The seller has earned the right to gratuity on the employees' behalf over many years, in effect by running the business on the services of people who have not yet been paid for their tenure. The buyer takes over the same people and the same entitlement. If the price was set on a multiple of earnings and nobody adjusted for the accrued amount, the buyer has paid for a business and also inherited a bill that the seller never funded.
Where it sits in a valuation
Our valuations run three checks: earnings multiplied by a market multiple, the buyer-yield test, and an asset floor. Gratuity touches the first two directly, and it reduces the asset floor like any other liability.
In the earnings check, gratuity affects normalisation. If the company expenses gratuity only when staff leave, reported profit in a quiet year looks better than the true cost of employing the team. A year with few departures flatters the earnings. We restate profit to include a full annual charge for the amount the staff earned during the year, so that the multiple is applied to a figure that reflects what the labour really costs. We describe the wider adjustments in what UAE SMEs actually sell for in 2026.
In the buyer-yield test, the question is what cash the buyer keeps after paying himself. We explain that arithmetic in the buyer-yield test explained. A buyer who expects to hold the staff for years will treat the unfunded balance as a call on cash he will have to meet at some point, and he will want it reflected in the entry price or in the structure.
How we compute it
We start from the payroll file. For every employee we need the joining date, the current basic salary, the contract type and the status of the labour card. From those we calculate the accrued amount as if every employee left on the proposed completion date, using the statutory formula as counsel confirms it for the entity and the jurisdiction in question.
Three problems appear in almost every file.
- Salary split. Many employers pay a low basic salary with large allowances. Gratuity is calculated on basic salary, so the split matters enormously, and the figure on the labour contract is not always the figure the employee believes applies. We take the contract and the payroll record, and we flag any gap between them.
- Tenure that does not match the licence. Staff transferred from a sister company, rehired after a gap or moved between visa categories may have continuous service that the records do not show. A buyer will assume the longer period unless the seller can document the shorter one.
This is where the diligence triangle earns its place. VAT returns establish the turnover. Bank statements show what actually left the account. The wages protection records show who was paid, how much and on what basis. When the three agree, the headcount and the salaries are credible and the gratuity figure can be computed with confidence. When payroll shows twelve people and the bank shows cash withdrawals that look like twenty, we have found both a risk and a number we cannot yet put in the model. Our wider approach to proving profit is in how buyers verify the profit of a UAE business.
Three ways it moves through a deal
Once the figure is known, there are three ordinary ways to deal with it. They are not mutually exclusive, and the right one depends on the buyer, the deal size and the trust between the parties.
A price deduction. The accrued amount is treated as a debt-like item and removed from the headline price, dirham for dirham. This is the cleanest approach and the one professional buyers expect. The seller pays by receiving less, the buyer inherits the liability with the cash to meet it, and nobody has to track anything after completion.
A retention. A defined portion of the price is held back and released as the liability crystallises or after a set period, with the balance returned to the seller. This suits cases where the figure is uncertain or where the seller disputes it. It needs a clear formula and a named person holding the funds.
Offset against deferred consideration. Where part of the price is paid by post-dated cheques over time, the buyer may reserve a right to set off any gratuity not disclosed or not accounted for. We cover the mechanics in deferred consideration and post-dated cheques. Set-off clauses need careful drafting so that a genuine claim is distinguishable from a pretext, and they are a subject for counsel.
A hypothetical to show the effect
Take a business with AED 900,000 of normalised earnings valued at 3.0 times, a headline figure of AED 2.7 million. Suppose the payroll file shows an accrued gratuity of AED 180,000 that the company has never provided for. This is a hypothetical for illustration and not a market figure. A buyer who treats it as a debt-like item pays AED 2.52 million. A seller who had planned around AED 2.7 million has just learned that the number he was told in the first meeting was never the number he would receive.
The seller's reaction depends almost entirely on when he learns it. If the figure is on the table in the first week, it is a known adjustment that we explain and he plans around. If it appears in the buyer's diligence report three weeks after a signed term sheet, it looks like a renegotiation, and it damages trust that took months to build. The arithmetic is identical. The consequences are not.
Why we raise it before the market does
This is the main reason gratuity appears in our underwriting before a mandate is signed. We describe the wider process in how we check a business before we take it to market. Pricing a business without the payroll file is guesswork presented as a range, and the part of the range that depends on gratuity is the part the seller will least expect to move.
Raising it early does three things. It gives us a defensible valuation that already includes the adjustment, so there is no downward revision later. It lets the seller decide whether to fund the liability before sale, which can improve his net outcome by removing a point of negotiation. And it tells the buyer that the numbers have been built by someone who looked, which changes how hard he feels he must push.
What an owner or buyer should ask
If you are selling, ask your accountant what the accrued gratuity would be if every employee left tomorrow, and whether any of it is recorded in the accounts. If the answer is a shrug, assume it is unfunded and assume a buyer will find it.
If you are buying, ask for the payroll file, the contracts and the wage protection records, and compute the figure yourself before you agree a price. Ask whether basic salary matches the contracts, whether any service is continuous across entities, and whether anyone is paid outside the system. Then decide which treatment you want and put it in the offer, not in the diligence response.
For how this fits into a complete sale, from first conversation to completion, read our process. The valuation work is described under our services. For the owner's side of preparing a business for sale, UAE Exits covers what to put in order before a buyer arrives.
Written by Joseph Coello, Founder, Coello Advisory. If you want to know how a buyer would treat the gratuity liability in your business, send the basics on WhatsApp.