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THE IMPORTANCE OF THE “DUE DILIGENCE” PROCESS IN COMPANY PURCHASE AND SALE OPERATIONS


Edson Gissoni and Rual Rousselet – Mergers and Acquisitions Leaders at DMS PARTNERS


Although it is a practice still under development in the Brazilian market and generally associated with an audit, due diligence is an increasingly fundamental step in the process of buying and selling companies. This is a complex procedure, whose main objective is to verify whether the numbers, projections and procedures presented by a company reflect its market reality, and its potential and risks for the near and long future.


The English term due diligence refers to the procedure for studying and investigating different factors of a company, with the aim of analyzing possible risks that it may bring to different interested parties (buyers, investors, suppliers , business partners and other stakeholders). In this way, due diligence can be understood as a type of audit, although it has deeper implications than just an audit, analyzing financial, legal, labor, accounting, tax, environmental and even technological aspects of the company.


Buying and selling a company, whatever the field of activity, involves issues

complex for all parties. There are risks that must be thoroughly analyzed for the negotiation to be completed successfully. To achieve this, some tools must be used to minimize problems or, in the worst case scenario, put an end to a possible transaction. Due diligence is one of them.


In the scenario of a businessman looking to sell the company or looking for investors for his business, he must pay attention to the situation the company is in and how it is possible to improve, optimize processes and resolve problems before an M&A operation. Due diligence contributes to the success of this negotiation, leaving the company prepared for the sale. On the side of the investor who is buying the company, the due diligence process is even more important, considering that a detailed study will be carried out of the company in which they will deposit their investments and, of course, from where they expect to earn profits and revenues.


In general, due diligence is widely used in the M&A process, especially by the entrepreneur who will be making new investments. This is because, once the due diligence has been carried out, it will be possible to investigate all the problems of that company and bring security to the operation.


In practice, in the M&A process and according to Deloitte , there are some types of due diligence to consider:


Financial : detailed analysis of all factors that may affect asset value, such as revenue and quality of earnings, working capital, net debt, taxation and other areas of risk;


Tax, labor and social security : data collection to identify

exposure to labor risks and their possible recurring impacts on EBITDA, such as legal obligations, debts and other factors related to legislation;


Human Resources : assessment of the culture and organizational structure of the target company,

compensation programs, HR practices and policies, collective agreements, turnover rate and demographic analysis;


IT : comprehensive analysis of technological architecture involving processes, systems, applications, infrastructure and security, to identify potential risks and sources of synergies;


Commercial : capturing information about the main market dynamics and trends, as well as consumer perception of the brand or company;


Operational : diagnosis of key aspects of the target organization, including history,

operational performance, cost structure and survey of potential sources;


Environmental : Identification of possible environmental liabilities. This can be done by analyzing documents such as environmental licenses, environmental impact assessments and compliance records. On-site inspections are also carried out to assess the condition of the property and identify possible environmental risks;


We will see, below, what steps are necessary to carry out due diligence on a company, based on the interests of the person requesting due diligence.


Team creation

Firstly, the formation of a multidisciplinary team is essential so that all documents and information analyzed are properly understood, thus providing a more accurate analysis of the business. Therefore, a due diligence team may be composed of accountants, economists, investment analysts, lawyers and administrators, who will analyze the company's values and risks.


Business knowledge

With the team formed, the consultants will carry out a mapping of the business, so that they have a broader view of how it works, what its activities are, how they are performed and their specific characteristics. It is from this knowledge of business methods that consultants will be able to collect the documents and information that they will need to have access to in order to carry out their due diligence accurately, based on the interests of those who requested the procedure.


Collection of documents and information

By understanding how the consulted business works and what the objective of the person interested in due diligence is, the consultants will request a series of documents and information from the managers and those responsible for the analyzed sectors of the company. It is important to highlight that this document analysis is accompanied by a confidentiality agreement, as the consultants will analyze documents and information relating to the entire business and operation of the company, which are highly confidential. Among the documents analyzed are: accounting books, contracts, corporate distribution, assets and liabilities, litigation area, proof of tax payments, financial statements, certificates, proof of

heritage, among others. The information and documents that will be requested by diligence depend exclusively on the interested party's objective. The documents will be different if the objective is the purchase, incorporation, merger or just the execution of a supply or service contract.


Results presentation

Finally, the presentation of results is carried out through the formalization of a

document with the information and analysis necessary for the final objective of due diligence . Through spreadsheets and other expository documents, consultants will be able to present the results obtained in their areas of knowledge, providing a broad analysis of the entire business in question, enabling a real analysis of its value and potential in the future.


As we can see, due diligence is an extensive procedure, which analyzes different sectors of a company with the aim of presenting a complete study on the real value of a company, its growth projections and potential business risks. Therefore, due diligence is a very common procedure within the acquisitions and mergers market, since the interested party who acquires a company inherits the entire business, including its liabilities and risks. Therefore, it is essential that the due diligence process is meticulous, so that it is possible to understand the positioning of the business in the market, enabling interested parties to have a full understanding of the acquisition and its potential.


DMS Partners has a team of experts in Mergers & Acquisitions (M&A), who can help you with all aspects of the process of buying or selling companies.


References :

Due Diligence – What is it, what are the types and how to do it – DocUsign Blog


Due Diligence -Mergers and Acquisitions Portal – May 20, 2022


Mergers and Acquisitions - The importance of the Due Diligence Process – Suno

News – Alessandra Borrego


Mergers, Acquisitions and Due Diligence – An Overview – BV/A


Find out everything about Mergers and Acquisitions (M&A) – Uplexis Tecnologia – May 3

2023 – Gabriela de Britto Maluf

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