Identifying contingencies before the buyer does changes price, timing and holdback.
From an informational standpoint, selling a company is an asymmetric contest in which the seller starts ahead. The seller knows the business and the buyer does not. But it is the buyer who defines the scope and presents the findings.
Preparatory diligence reverses that dynamic. The seller examines its own company with the rigour with which it will be examined, fixes what can be fixed, quantifies what cannot and comes to the negotiation knowing what the buyer will find. This is not an exercise in diligence for its own sake. It is the intervention with the best cost-to-effect ratio on the final price of a transaction.
Preparation acts on three variables, and it is worth separating them because they behave differently.
The first is price. A contingency found by the buyer's diligence turns into a reduction claim. The same contingency, identified beforehand and presented with its own quantification and defence history, can be discussed at another moment, which makes it easier to address in the agreement.
The second is timing. Diligence that uncovers corporate disorder, unkept books, unregistered minutes, unpaid capital or a poorly documented chain of title generates not only a discount but delay for remediation.
The third is the holdback. Organized information reduces uncertainty, and less uncertainty means a smaller holdback.
Scope varies by sector and size, but there is a core that recurs and whose absence is felt in practically every transaction.
| Workstream | What usually surfaces |
|---|---|
| Corporate | Books and minutes in arrears, unregistered amendments, unpaid capital, outdated shareholders' agreement, gaps in the chain of title |
| Contracts | Change-of-control clauses requiring prior consent, forgotten exclusivities, expired agreements still being performed, guarantees granted to third parties |
| Labour | Classification of contractors, working hours and time banking, payments of contested nature, pending claims and settlement history |
| Tax | Use of credits, tax benefits without documentary support, ancillary obligations, instalment plans and their effect on the transaction |
| Real estate and environment | Title records and occupancy, expired or pending permits, unmet conditions, site liabilities |
| Intellectual property and data | Title to trademarks and software, assignment of rights by employees and third parties |
| Compliance | Policies actually applied, dealings with public officials, donations and sponsorships, whistleblowing channel |
It acts mainly on three variables, since it usually reduces the discount claimed from buyer findings, shortens the timetable and lowers the portion of the price held as security.
Labour and tax account for most of the amounts in Brazilian practice.
The Gotlib Rocha team acts on preparing the company, running the competitive process, negotiating the agreement and managing the post-closing period.
Talk to the teamAbout the practiceThis piece reflects the firm’s analysis of the subject as at the date of publication. It is informative in nature and does not constitute legal advice on any specific matter. For advice on a particular situation, please contact our team.
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