Rafael Tridico Faria
Lawyer at Marcos Martins Advogados
Carrying out aDue Diligence is a process that many entrepreneurs are used to hearing about when they are going through a procedure to acquire or purchase a company or a large number of assets. But what is due diligence and what are its objectives?
Due diligence is an investigation of atarget company in which the liabilities and risks involved for the target company and the eventual buyer are analyzed. This investigation is carried out by analyzing certificates, contracts, corporate and tax documents, compliance information, data protection, labor information, ongoing administrative and judicial proceedings and all other legal information that may indicate sources of risk related to the company’s activity. Because it requires an in-depth examination of documents, it is common for this process to take a long time, both because of the time it takes to collect documents, which may not even be digitized, or because of the time it takes to issue the certificates requested, and, of course, because of the time it takes to thoroughly analyze all the information submitted[1].
Notably, the windows of opportunity for company acquisitions are often small. This requires a great deal of mobilization on the part of the team of professionals carrying out the Due Diligence, on both ends, on the one hand to quickly and efficiently deliver information or clarifications, and on the other to provide a solid opinion on the risks involved in the transaction.
The final due dilig ence report is an extremely important document for whether or not the deal goes ahead. The report can provide information on major liabilities that were not accounted for or included in the valuation of the deal and which can have a significant impact on the price of the acquisition and the follow-up of the deal itself.
Another common time we see due diligence being carried out is when securities are issued, such as debentures. In-depth knowledge of a company’s financial situation and corporate governance is of extreme interest to those who will be acquiring the debentures. It is therefore common for the issuing company to carry out due diligence and present it to the coordinator of the issue, in order to ensure its soundness and ability to pay.
Similarly, in an Initial Public Offering (“IPO”), the company going public is obliged to carry out a Due Dil igence and expose to the entire market its relevant and strategic contracts, its risks and all the relevant information that may have an impact on the trading of its shares.
Therefore, we can see that Due Diligence is a process that is at the center of major moments in a company’s corporate life, acting as a strong source of pricing and viability in doing business.
But due diligence doesn’t necessarily have to be carried out only at these moments. The Due Dil igence tool can be used actively by a company, as a monitoring instrument that is linked to its day-to-day operations.
Carrying out periodic self-Due Diligences by a company can yield several benefits, increasing its management capacity and making it easier to raise funds from third parties.
By carrying out small periodic Due Diligences, a company will have a better understanding of the validity of its licenses, its contracts and risk mapping, and will thus be able to actively prevent risks from turning into problems. Periodic analysis of your contracts can generate a better understanding of your needs and thus improve your ability to negotiate with suppliers and even financial credit institutions.
It will also be possible to check that the contracts are in line with the company’s objectives, whether it’s to contain costs or expand its activities. The culture of carrying out internal Due Diligences is something that strengthens a company’s corporate governance, which will be better able to adapt the contracts and procedures checked to internal policies, which will be more customized to the company’s needs due to its deeper understanding of its business.
In addition to the benefits reaped in day-to-day business, the culture of carrying out Due Diligences over time will create greater agility and the ability to carry out more extensive Due Diligences in the aforementioned situations of acquisitions or securities issues seen above. This can have a major positive impact on the time it takes to carry out a due diligence, making it easier to conclude deals.
In conclusion, we can see how important it is for the business world to carry out a solid and extensive Due Diligence, since it is through this procedure that decisions are made, by getting to know the risks and liabilities of a target company or issuer in greater depth.
We can also see that using this tool on a company’s day-to-day basis brings benefits to its management, governance and compliance, as well as impacting its ability to negotiate with third parties due to a solid internal knowledge base of its licenses, registrations, obligations, contracts and objectives.
Questions? Talk to our lawyers for advice.
[1] Sometimes rounds of questions and answers, known as “Q&As”, are also necessary.
