The sale of a company transfers its control, but not its risks in Brazil: every representation made by the sellers in the sale is a portion of the price that may still flow back to the buyer.
The sale of an equity interest marks the end of a chapter for a business owner. In practice, however, the seller remains tied to the business for a period that may extend for years, by virtue of the representations made about the company and the commitment to indemnify the buyer should any of them prove inaccurate. How these obligations are structured determines how much of the price is, in fact, at risk.
1.Condition at Sale: The agreement sets out a series of representations and warranties by the seller regarding the condition of the business at the transaction date, covering indebtedness, material contracts, pending litigation, and labor and tax compliance. This information becomes the benchmark for the deal, and any discrepancy with reality may trigger an indemnification obligation, regardless of whether the seller was aware of the issue.
2. Indemnification Limits: Parties typically agree on a cap, usually expressed as a percentage of the purchase price, and a minimum threshold below which smaller losses cannot be claimed. Without these parameters, the seller may see a far larger share of the price at stake than anticipated, or face a succession of low-value claims that place disproportionate strain on the post-closing relationship.
3. Exposure: The seller’s liability generally runs for a contractually defined period, which may vary according to the nature of the risk. In Brazil, labor and tax matters tend to call for longer windows, as contingencies in these areas can materialize years after the transaction. Calibrating survival periods by risk category prevents open-ended exposure to matters that are no longer under the seller’s management.
4. Price Holdback: As a security mechanism, buyers often condition part of the payment on a direct holdback or a deposit into an escrow account. For the seller, an escrow provides assurance that the funds will not remain under the buyer’s sole control, but it also means that full liquidity from the sale is achieved only at the end of the agreed period, a factor that should be built into post-transaction financial and wealth planning in Brazil.
5. Due Diligence: Before closing, the buyer conducts a thorough review of the company. A sensitive point in the negotiation is whether risks identified during this process may still be claimed after signing. Making clear whether everything that is known falls within the scope of indemnification is essential.
The success of a sale is often measured by the headline price, but the value that actually stays with the seller depends on the scope of the representations given and the limits negotiated. That is why negotiating an M&A transaction in Brazil goes far beyond price, as the price may be revisited at any time if the agreement does not set out clear responsibilities.
