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“Due Diligence”: your greatest ally in the purchase of a Company

Nowadays many investors are considering the option of acquiring or merging societies to grow and have a better position in the market, which is increasingly becoming even more competitive and voracious to small and medium sized companies.

These contract processes, whose final aim is to sign a deed of purchase-sale of shares or participations, are in general initiated through a first contact between seller and buyer, followed by a first period of negotiations, and finally ending by signing a Letter of Intent.   

In this Letter of Intentions contains both purchasing and selling intentions of the parties, the obligation of confidentiality, as well as the need of a “Due Diligence” process undertaken by the purchaser that guarantees the legal, taxing and financial situation of the company make adequate or not the intended acquisition

Due Diligence: What is it and what is it for?

Therefore, the “Due Diligence” is a revision or audit of the legal, taxing and financial situation of the company, to obtain precise and accurate information to evaluate the adequacy of the investment, and if so, determine the price and the contract conditions of the operation.

In sum, the objective is to get the most detailed photograph of the situation of a company, so the purchaser can take a decision being properly and completely informed, as much as being aware of possibilities or future potential contingencies, regarding all its analyzed and audited aspects.

To do so, it is necessary that the seller gets involved in this Due Diligence, expressly committing to facilitate all required documentation and information, because in the opposite case, all this work would not have been worthy. If the information is not true or it is incomplete, the result obtained will not be correct.

Which are the aspects that can be analyzed in the Due Diligence?

In general, all “Due Diligence” do an overall review of the legal, taxing and financial situation of the company. However, it is recommended that besides of these general issues, they also assess other aspects that can be considered relevant in each case.

Thus, we consider that it could be also necessary to revise, amongst others, technological aspects (especially websites, online purchase systems, and informatic systems), marketing aspects, environmental aspects, contract situation, etc.

In conclusion

I you have the intention of purchasing or merging with another society, it is highly advisable -not to use the word indispensable- getting professional, expert assistance, so they can assess the specific case situation of the company object of the operation, considering questions regarding de adequacy of the investment, and which would be the future contingencies in case an acquisition eventually takes place.

Otherwise, serious mistakes could be committed in the assessment of the purchased society, either in their legal, tax or financial situation, with important consequences that could go beyond the mere loss of your investment.


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