Due Diligence for Dummies

Rebeca Duran

Staff Writer
The Brazil Business

Updated

26 August 2013

Closing a deal is a very important step, but before doing it you should be aware of all important information related to the company you're negotiating with. This article highlights the importance of making a due diligence and how it must be done in Brazil.

If you're aiming to close a business of any type you'll probably wish that everything goes right, but how can you guarantee this if your business partner lives in another country? Or if you're planning to invest in a transnational company?

These are just examples of economic transactions, but in every situation involving business partners and traders it is fundamental to have transparency during the whole process of negotiation in order to avoid coups or unpleasant discoveries after you have closed the deal.

Introduction to Due Diligence

You need to be knowledgeable about the parties involved in the negotiation and that's why due diligence exists. Due diligence is a legal procedure and its main function is to point out some aspects of the company with which you're making business with, such as:

• the corporate structure
• existing and potential liabilities and their quantification
• strategies for overcoming such liabilities
• the best way to structure the transaction

Due diligence works as an investigation that allows the identification of relevant situations before the completion of the negotiation. It advises executives who are in the process of decision making through the supply of information that contributes to the prevention of risks and impacts related to transactions between companies.

When must it be done?

Due diligence is an important step in economic transaction, but it's not mandatory in Brazil. Normally it is a choice or a consensus between the companies involved in the transaction, a voluntary initiative. There are four moments when due diligence is advisable:

• merger, sale or acquisition of a company
• raising funds to finance long-term projects
• elaboration of plans for the liquidating of a company in the event of its closure when it is not possible to sell it
• periodically, for the preparation of the Strategic Budget

The procedure can be elaborated by an internal analyst from one of the companies involved, although it is recommended that independent consulting companies should do this. A consulting company can guarantee the impartiality during the process, avoiding any favoritism between the companies.

About the Procedure

The procedure of due diligence can be subdivided in three important steps:

• investigation mainly by interviews and documentation analysis
• elaboration of reports
• collection of relevant material and analysis and interpretation of the data and documents collected.

Content of a Due Diligence

The content of a due diligence varies a lot, depending on the type and size of negotiation and the partners involved. The consulting company must have the ability to identify which information is actually necessary to give transparency to each different negotiation.

The consulting company should also work in order to obtain all necessary information to the correct evaluation of the companies involved. It is relevant for the parties to have the information below: