The importance of due diligence in merger and acquisition processes

A full knowledge of company’s actual situation on accounting issues, taxes, labor and social security is critical to mitigate risks and take assertive decisions.

Companies may find answers in the due diligence process solutions to the risks involving new business that will support decision-making. Such studies are essential for companies in cases of acquisition, merger, or consolidation.

From January to July this year, Brazilian market recorded 389 transactions, according to the Transactional Track Record (July/2017) report. These numbers guaranteed to Brazil the leadership in the Latin American scenario of mergers and acquisitions in this period.

A due diligence process should preceded these operations, essential for an accurate business diagnosis, to establish guarantees and tax investment structuring.

Domingues e Pinho Contadores, reference in operating due diligence in accounting, tax and labor areas, lists the key stages of this work:

Preparing the company for due diligence

This step involves an initial observation in which the consultants know the main business characteristics and map the appropriate environment to that strategy, to the contracted scope and to the survey objectives.

During this phase, schedule and the methodology to be employed are also defined, and employees that will be involved in the project from the evaluated company are scaled.

Business X-Ray

During the development of the activity, the consultants evaluate data and documents relevant to the scope, so that it is possible to perform a full in-depth assessment evaluation of company's situation.

- Accounting and tax risks:

In accounting and taxes, due diligence comprises review of balance sheets and accounting and financial statements, review of accessory obligations and conformity to federal, state and municipal taxes, among other issues.

The checking may indicate, for example, that the incorporating company should be subject to pay significant sums in the future to cover taxes not properly paid.

This kind of conclusion highly influences the terms of deal, because if failures are detected, the company interested in the merger will estimate and consider possible losses value agreement’s signature.

- Labor Risks:

For labor and social security issues, there is a procedure with the survey of labor contingencies, review of accessory obligations, and analysis of the adopted hiring forms and possible risks.

Results that will support the decision-making

For requiring much detail, the due diligence is not a procedure to be hastily performed. Although duration is related to the business size and the investigated scope, the study should be in a greater depth to guarantee its accuracy and reliability.

This information analysis leads to the identification of errors and points of attention that may pose threats to the client. This result shall provide a clearer picture of the moment of business and risks, basing future decisions.

The final product is a fair report in which the observed facts are described in details. The due diligence does not indicate whether the transaction is advantageous to the parties and does not suggest values for negotiation. This judgment is up to the investor, who, in possession of material, will be provided with qualified information to make the most appropriate and profitable decision.

Anyway, who hires the consultancy service must have confidentiality and impartiality guarantee in conducting the activities. Moreover, it is necessary to combine the technical knowledge to ethical performance in this thorough assessment. Hence, the importance of having a renowned assistance to perform this work. Domingues e Pinho Contadores brings together experts in this subject and has a consolidated presence in operational due diligence, which enable it to assist companies of all sizes and segments in this process.