DUE DILIGENCE IN M&A PROCESS
The Due Diligence phase within a process of Merger and Acquisitions (M&A) is one of the most important and crucial ones. It is common and recommendable before closing a deal, the conduction of a Due Diligence by the investor in the company being acquired, which is an exhaustive inspection, usually in legal, tax, accounting and corporate areas. At this moment it is required a number of different documents that prove the situation presented by the company or that shows the compliance to Brazilian legislation, eventually pointing out the risks and liabilities that might be quantified by the buyer through contingencies.
Upon this stage, all the possible risks will be raised and they might become contingencies to the purchase agreement. The contingencies are amounts corresponding to the risks assessed that will be retained from the price of the business until the risk is extinguished. Depending on the size of the contingency identified, the investor might even quit the transaction, for that reason, there is a great importance in the phase of preparation of the company for sale and the concern in reducing and mitigating the possible risks.
The amount separated for the contingencies retained from the normal price of the business is kept in an Escrow Account, a type of guarantee account, managed by financial institutions or guarantee agents, in which the amount is deposited by the purchaser, but it can only be withdrawn by the seller with the approval of both parties, in this case from the sellers and the purchaser. After raising the risks in the Due Diligence, the purchaser might also require some other kind of real collateral or warrant in order that the seller can cover all these contingencies in case they become real, waiving the retention from the price and the Escrow Account.
The Due Diligence may be an intense and complex stage for many entrepreneurs and other people involved in the submission of documents, but it doesn’t need to be like that. It is possible to run a preliminary gathering of documents that will most likely be required, acting in a proactive way of adequacy of those missing or incomplete. Knowing the situation of the company regarding compliance, controlling and the availability of documents. The regularity of its documents provides for the company the possibility of foreseeing and organizing more smoothly an action plan for when the Due Diligence phase really arrives, the company is prepared and in a comfortable position.
Do you know if you have all the documents you need for a Due Diligence? Do you want to be prepared to sell your business in the future or even keep your company in compliance? Talk to one consultant from Dutra Business Management to get more information.
By Gabriela Kauer