Brazil’s Best Counsel 2022 - Chapter Opening: Transaction Services

Posted Monday, December 13th 2021
Brazil’s Best Counsel 2022 - Chapter Opening: Transaction Services

The COVID-19 pandemic had critical consequences for businesses and brought about considerable uncertainty about the future. However, life went on, and the M&A plans that had been put aside in 2020 have been dusted off.

Besides the strong devaluation of the Brazilian Real and the instability of the political and economic scenario, the markets continued to be avid for business trades and the papers of many new companies which began operating in the market.

Facing this situation, several foreign investors and domestic business owners were motivated to start investing in new papers in the market. A record number of deals was successively broken at B3, Brazil’s main stock exchange.

In order to improve this kind of operation, a massive number of new investors, who traditionally wouldn’t operate in stocks, started to allocate resources in the capital market. In turn, the now capitalized businesses are aiming to consolidate themselves or go a step further in its product and services chain, as well as broadening their market, supercharging the number of transactions.

Plenty of opportunities came and will continue to come. Businesses that didn’t already have a good performance prior to the pandemic, with the difficulties brought by the outbreak, were forced to seek investors and investment options in the market.

It is a common understanding that the worst has passed, and that the post COVID-19 world now can be taken casually, which is a positive sign for businesses to experience growth again.

Businesses that didn’t already have a good performance prior to the pandemic, were forced to seek investors and investment options in the market

It should also be noted that global economies that endured several challenges in the past months are starting to spot a much more positive scenario.

The pandemic also brought opportunities for new kinds of businesses, especially for innovative and disruptive ones. Additionally, a new batch of opportunities emerges every day, and many more are trying to look at it differently and change old concepts.

For the benefit of M&A transactions, we can’t ignore that Brazil has one of the lower per capita consumption rates of developing countries. In terms of infrastructure, the country has a great number of opportunities.

Another business accelerator is the current devaluation of the Brazilian real compared to the main international currencies, such as the dollar and the euro, which raises foreign investors’ expectation for gainful transactions. However, the decision of going forward with a buying or selling operation should always have a solid basis and be taken with due skepticism.

We insist on these premises because this decision should consider the level of reliability that can be placed on the historic numbers and the financial and operational performances of the target company, as well as ensure an observance of adequate compliance to the law and applicable regulation to the businesses over time, free from contingencies and surprises.

This is why it’s important to maintain accounting and documents in good order. Many transactions are unsuccessful due to the lack of organization and poor quality of the accounting figures, documents, and internal controls.

It's mandatory to make a detailed assessment of risk-related operations and the effective feasibility of the business plan prepared for the following years.

Something that can be regularly observed is that many business owners who go through an M&A process, even those with good governance, are surprised by lengthy accounting, due diligence reports and tax and labor contingencies in their businesses, as well as deficiencies in internal controls and risks that are not being duly controlled.

This situation can possibly result in deal breaking, postponement of the business trade or reduction of the transaction price.

Numerous investors, who traditionally wouldn’t operate in the stock exchange, have begun to allocate resources in the capital market

Usually, at an inconvenient time, business owners who are unaware of the importance of aspects of accounting and internal controls find out that their business is not prepared for an M&A operation. The general lack of controls and information to support secure data for the potential investor to make a reasonable judgment on a potential acquisition is common, to some extent.

In most cases, there are problems associated with the lack of accounting information, controls and managerial reports. It makes it impossible to validate costs and margins because the data are non-existent or disorganized.

This is why it’s important to always keep your business well-organized.

For that reason we recommend conducting a sell side due diligence before revealing the intention to sell. This type of work will significantly reduce issue-related contingencies, price discussions due to risks and vulnerabilities, among other aspects that could even bring the operation to a halt.

An M&A transaction involves many steps, from pricing and identification of the potential target to the due diligence performance, price discussion, guarantees, and a formalization of an agreement.

Without adequate guidance from experts, it could all become fruitless.

To make this challenge easier, business owners should hire an expert advisory group to identify the buyer or the seller and for advising throughout the whole transaction.

Another aspect that has been proven relevant in transactions is the Technology Due Diligence, that aims to seize and analyze risks and vulnerabilities of the businesses’ technology environment.

The quality of the ERP and of all the technology structure is analyzed, and the risks of hacker attack is assessed, as well as possibilities of systemic failures due to a lack of updates, quality and security of integrated systems and other risks that are relevant for the business.

This area has been receiving special attention in view of the recent events involving corporations that had its employees and/or its clients data exposed by hackers, and even others that had its operations temporarily halted, with relevant damage to its business and reputation.

Many businesses found it difficult to justify themselves to society in a more robust way, also considering that the General Data Protection Regulation came into force, with heavy consequences to them.

What PP&C has been doing over time is to assist business owners in getting ready on a daily basis, in all operational, financial, tax, labor, accounting, and technological aspects, in such a way that the risks can be identified, reduced or eliminated, the accounting and financial figures can reflect reality and problems are anticipated and could solved.

All it has great value and will reflect very well in the transaction result - adequate accounting associated with good internal controls can help maintain the buyers’ appetite.

PP&C is recognized for its competent professionals, who have broad experience in management and business. PP&C’s due diligence work is not limited to the standard balance verification and contingency documentation procedures.

We care about the aspects of the business, the opportunities to streamline costs and the identification of process gaps with direct influence on results.

Count on PP&C for your Due Diligence processes, for either Sell or Buy sides. Our professionals have broad experience in business management and are aligned with its clients and lawyers, encouraging and seeking new opportunities and alternatives. This practice makes all the difference.

 

About the Authors:

Eduardo Camillo Pachikoski

Eduardo Camillo Pachikoski has more than 40 years of experience in M&A, auditing, internal auditing, SOX, taxes and consulting, having spent the last 30 at PP&C.

E-mail: ec.pachikoski@ppc.com.br 
Phone: +55 11 3883-1600
 

Paulo José de Carvalho

Paulo José de Carvalho has more than 30 years of experience in the management and execution of external audits, M&A and consultancy work, having spent the last 29 at PP&C.

E-mail: pj.carvalho@ppc.com.br 
Phone: +55 11 3883-1600
 

Giácomo Walter Luiz de Paula

Giácomo Walter Luiz de Paula has more than 20 years of experience providing auditing services to Brazilian and multinational companies as well as working in diversified lines of business.

E-mail: gw.luizpaula@ppc.com.br 
Phone:+55 11 3883-1600