The value of an acquisition lies not only in the agreed price but also in the legal certainty regarding the underlying assets. In Brazil this presents a major challenge when conducting the economic feasibility analysis of an acquisition deal.
A significant portion of the risk in a Brazilian M&A transaction stems from the valuation and transfer of the assets that make up the business. Tangible assets, such as real estate, machinery, equipment, and inventory, require an objective assessment of ownership, liens, and any regulatory or zoning restrictions. Intangible assets, such as trademarks, patents, software, copyrights, and databases, demand even greater scrutiny; ownership issues regarding these assets tend to be more subjective, and improper formalization can jeopardize the exclusive use the buyer expects when acquiring the business. Failure to address these matters can result in legally vulnerable assets subject to disputes, usage restrictions, or even an inability to transfer them.
In light of this, we highlight 4 essential considerations for asset valuation in M&A transactions in Brazil:
1. Verification of contracts linked to the asset: In many cases, an asset’s value is directly tied to the contracts that enable its utility. Analysis should not be limited to the mere existence of these contracts but must also consider the possibility of assignment or transfer in the event of an M&A transaction, as well as the presence of change-of-control clauses that could allow for termination or renegotiation. Acquiring assets without assurance regarding the continuity of the contracts that make them useful can lead to a mismatch between the price paid and the asset’s actual cash-generating capacity.
2. Presence of hidden risks: Identifying contingencies, ongoing litigation involving specific assets, and administrative or regulatory notices that could result in restrictions or loss, along with any discrepancies between accounting treatment and legal reality, are essential points to evaluate before closing the deal.
3. Succession of obligations linked to the asset: Even without an express contractual provision, the buyer may end up inheriting liabilities tied to the acquired asset, whether related to labor, taxes, or the environment. This risk is particularly significant for real estate and industrial assets, where obligations often attach to the asset itself rather than just the former owner.
4. Requirement for third-party consents and approvals: In certain cases, the transfer of an asset depends on prior authorization from third parties, such as regulatory bodies, municipalities, secured creditors, or trademark and software licensors. Without such consent, the transfer could be deemed invalid or open to challenge, even if the acquisition agreement has already been signed.
The discussion regarding assets in Brazilian M&As is not merely legal; it is strategic. The way real estate, machinery, trademarks, software, contracts, and other assets are structured determines how much of the transaction’s projected value will actually be realized after closing. Due diligence that treats assets merely as items on a checklist, without investigating their legal and operational soundness, increases the likelihood of price adjustments, litigation, and unmet expectations.
