‎Company Due Diligence in Brazil

Due diligence is nothing more than an investigation process carried out within the framework of company acquisitions in order to assess the risks and contingencies of the company to be acquired.

When a company is interested in acquiring or investing in another, given the economic magnitude that the operation may entail, it is convenient to carry out an investigation process to be able to appreciate unknown or Due Diligence aspects.

Both in the purchase of Companies by third parties, and in the significant investments that are intended to be made in businesses not directly controlled, one of the issues that is most important for the future success or failure of the operation is to carry out an adequate Due Diligence or legal review of the object of the purchase.

What is it for?

Due Diligence allows the investor to have an X-ray of the company that is the object of their interest, the status of the operating account and its balance, labor liabilities or compliance with legal obligations, among others. It is useful, very useful, to be able to appreciate possible Due Diligence liabilities in the business, review contingencies that may have occurred, identify synergies that may be beneficial and plan an appropriate strategy, tending to achieve, where appropriate, the greatest possible economic benefit after the corporate acquisition.

In line with the detection of possible unpleasant surprises, another functionality of the Due Diligence is to provide information that justifies the determination of conditions precedent and guarantee clauses. From the legal analysis of the company, two facts can be inferred, for example, the lack of some type of license or element necessary for the survival of the business or the existence of risks not taken into account.

To cover these contingencies, guarantee clauses are established, which are nothing other than contractual stipulations in which, under the autonomy of the will, the parties make a series of reservations (conditions, terms, obligations ...) in connection with the transaction. Its veracity and accuracy are expressly guaranteed contractually since, in case of breach in the contract itself, the consequence of such "forgetting" is foreseen

Continuing with the advantages of this legal audit, we cannot forget the possible obtaining of arguments for the negotiation of the price. For example, if unexpected risks or obstacles are deducted from the DUE DILIGENCE, we may agree to a reduction or postponement.

In short, conducting Due Diligence minimizes the risks inherent in the sale of a company, and provides the buyer with an independent, objective and detailed evaluation of the business, especially reviewing the existence of Due Diligence liabilities or contingencies in each and every one. of the areas under review.

Process.

There is no regulation that establishes its content, length and scope. The development of a DUE DILIGENCE is marked, by the needs of the buying / selling process in question, by the size and complexity of the company to be acquired and by the prevailing uses and customs in this area.

In practice, it is usual that the DUE DILIGENCE is not carried out without first having reached a preliminary agreement that defines the bases of the operation.

This "pre-agreement" to call it somehow, is usually a letter of intent that expresses the will of the parties and that usually includes as essential content:

• The term to carry out the DUE DILIGENCE and the obligation of the seller to facilitate access to the buyer to all the necessary documentation and information

• A confidentiality agreement by the buyer regarding the information provided by the seller.

• A commitment by the seller not to negotiate or close the transaction with a third party while the DUE DILIGENCE procedure is being carried out

Ending.

After completing the entire investigation phase, the DUE DILIGENCE process will end with the preparation of a report detailing, among others, the commercial, technological, accounting and labor aspects that have been examined. It is important, in this regard, to emphasize that those responsible for the process will not only carry out a diagnosis or a representation of the company's image but will also a Due Diligence an interpretation of all this in order to advise the buyer about the decisions that In his view, they should be taken so that the transaction is adequate, timely and convenient.

The outstanding importance of DUE DILIGENCE is specified in that it can provide the buyer with a real image of the situation so that, based on this, and with the advice provided, they can promote the necessary changes to improve management.

From the moment that potential investors or buyers show interest in acquiring a company, until said acquisition is definitively carried out, an interesting information process begins in order to obtain a correct knowledge of the company to be acquired.

It is where the figure of Due Diligence comes in, the name by which the detailed investigation of the different business areas of a company is known.

The figure of Due Diligence continues to be a relatively unknown figure in our legal system, despite being a very widespread figure in the business scene in recent years.

The objective of Due Diligence is to reduce the risk of the transaction, since it provides the buyer with an independent and detailed evaluation of the company, being able to review possible Due Diligence liabilities or possible contingencies found in each of the study areas. This is postulated as one of the fundamental pillars on which the final decision to acquire the company is based, also derived from it, and if the purchase is made, the conditions that will govern it are established, that is that is, the conditions of the contract.

This greater knowledge of the investigated company entails the identification of the possible risks of the operation, as well as the opportunities, in a Due Diligence on to identifying, as mentioned above, the possible liabilities and contingencies that could imply a variation when determining the value of the company to be acquired.

Therefore, Due Diligence increases the knowledge that the buyer has about the company, which means that he cannot allege ignorance about the possible contingencies that may arise in the future.

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Once we have defined what a Due Diligence consists of and what it is for, we are going to focus on describing when it takes place, what it comprises, what it costs and how it ends.

When a Due Diligence takes place in a business sale

The Due Diligence would begin, after the period of contact and negotiation between the sellers and the buyers, when the latter show the real interest in the purchase of the company reflected in the "letter of intent", in this letter the intention is established of buyers to acquire the company in its entirety or a part of it if certain conditions are met.

The letter of intent includes:

The guidelines to be followed in the operation.

The obligation of the seller to provide access to all the information necessary to carry out the purchase of the company, setting the specified period of time.

The commitment of the buying party to keep the confidentiality of all the information received on the occasion of the operation, as well as the negotiation itself.

The seller's commitment not to sell the company to a third party for the duration of the process.

Areas covered by a Due Diligence

On the basis that Due Diligence depends on various factors, such as the type of transaction that is intended to be carried out or the characteristics of the buyer or seller, as well as the complexity of the business itself, the most common areas to which time to perform a Due Diligence are:

Financial area: which allows us to know the economic health of the company. Their numbers and their growth forecasts are analyzed. Its function in assessing whether the company is viable, its liquidity, as well as the degree of indebtedness it has and even its financial history.

Legal area: allowing to verify the legal situation of the company, the contractual relationships that unite it with third parties, the identification of possible legal proceedings that may affect the business, as well as its corporate situation. In this area, the rights of the company in matters of industrial and / or intellectual property are also verified.

Labor area: in charge of studying that the company complies with all the regulations regarding the labor relations of its workers. Verify that the remuneration systems are applied correctly, taking into account the seniority of the staff. In a Due Diligence on, they verify that the legal requirements with Social Security are being met.

Tax area: reviewing possible contingencies and that the company is up to date with its obligations with the Treasury.

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Although these areas are the main ones to review when a Due Diligence is carried out, we can find others that are equally important for the buying party to get an idea of ​​the reputation of the company, such as the position in the market and the commercial aspects of the same, conducting a detailed review of its structure and operation, as well as the