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:
|Identification||Full identification of the company, with CNPJnumber, inscriptions and certificates of private or government competent organizations and operating license (alvará de funcionamento).|
|Corporate Law||Analysis of corporate documents:articles of association, shareholder's agreements and proxies.|
| Financial Agreements || Analysis of financial agreements, focusing on liabilities, guarantees, and opportunities/impacts of it for the transference of the partnership power of control. |
|Suppliers Agreements|| Analysis of suppliers agreements, focusing on liabilities, guarantees, and opportunities/impacts of it for the transference of the partnership power of control. |
|Customer Agreements|| Analysis of customer agreements, focusing on liabilities, guarantees, and opportunities/impacts of it for the transfer of the partnership power of control. |
|Other Agreements|| Analysis of other agreements, focusing on liabilities, guarantees, and opportunities/impacts of it for the transfer of the partnership power of control. |
|Real Estate Law|| Analysis of documents related to real estate (rental contracts and /or property scripture, including the verification of the existence of guarantees). |
|Labor Law|| Analysis of labor obligations/social security, labor litigious and the risks involved. |
|Commercial Litigious|| Analysis of certificates issued by jurisdictions in which the company operates. |
|Taxation Law|| Analysis of certificates issued by the federal, state and local revenue and the administrative and judicial litigation. |
|Environmental/SanitaryLaw|| Analysis of environmental and health licenses |
|Intellectual Property|| Analysis of intangible assets related to company's intellectual property, such as brands. |