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The importance of due diligence when purchasing a business in Costa Rica

Before signing a business purchase contract, it is important to perform a due diligence to know the current state of the business. As you may know, due diligence is an exhaustive review of all the

Before signing a business purchase contract, it is important to perform a due diligence to know the current state of the business. As you may know, due diligence is an exhaustive review of all the aspects of a business that you need to be aware of when deciding whether to move forward.

Moreover, it is important to have an organized and exhaustive due diligence report as this serves as a guide for those interested in the purchase.

This process is based on good faith of both buyer and seller, both interested in successfully carrying out the transaction under fair conditions. During the whole process, there is strict confidentiality on all the data that is handled, by protecting the interests of the buyer, in case the transaction is carried out, and of the seller, in case it is not carried out.

The result of the due diligence is set out in a detailed final report, where all the aspects have been reviewed and conclusions on them are presented. Therefore, it is not merely an informative document, as it must contain legal remarks that will facilitate or prevent the transaction.

The due diligence report should be exhaustive (reflecting on each of the documents reviewed and indicating the most relevant aspects), and it must be accompanied by a summary of contingencies or an executive summary written in a precise and brief manner. All those facts and/or situations that may now or in the future constitute a liability or contingency for the target company, its shareholders/partners, the potential third party acquirer (buyer), or simply those that due to their nature, should be highlighted, taking into account the purpose of the operation of the business.

In case of the purchase and sale of a business, the due diligence is a short but intense process, in which all aspects of the company are analyzed by independent personnel to prepare a final report that reflects the real situation of the company, at the time of acquisition.

A proper due diligence report should contain at least the following:

– History of the company: in order to know where the business was created and the trajectory it has had.

– The operations: its functions from the beginning to the present.

– Products and services: what they sell and what services they provide.

– Its market: their target audience.

– Its competitive position: how the business performs with its competition and how it is positioned in it.

– The customers of the business and the state of the relationship with them

– Managers and employees: how many workers do they have, how much do they pay them, and their work schedule.

– The compensation systems they have in place

– Its facilities: check if they are owned by the business, if it is a lease or if it is up to date with the payment of municipal taxes and permits.

– Machinery

– Inventory

– Financial statements: if the business is up to date with its financial statements. The business should have an accountant to help them with everything to do with their finance. This sometimes entails a third party audit.

– Their production systems

– Planning and control

– Their marketing

– Their internal reporting systems

– Technology: whether the business has any software or computer system for its operation, or if this system is provided by a supplier.

– Possible environmental problems: this is important because in a country like Costa Rica where the right to a healthy and balanced environment is a constitutional right and a human right, businesses always try to be environmentally friendly, because non-compliance may lead to being accused of environmental crimes and the government may even impose sanctions.

– Its legal situation: all contracts, legal capacity to sell the company, registration of properties, that the legal books are in order, and that the company is in order with its legal obligations.

– Its fiscal situation: that it is up to date with all taxes and that it is not in arrears with the Ministry of Finance.

– Its labor situation: if it is up to date with the payment of salaries and insurance and with the Costa Rican Social Security Fund (CAJA).

– The company’s prospects.

– Insurance: if the business has any insurance, their insurance contract, the insurance company information and what does that insurance cover.

– Patents and trademarks: if the business has patents or any registered trademarks.

Debts: if the business has any debts with a bank, with their employees or a loan.

The above is a basic list of everything a business should have at hand to facilitate its successful sale, however it must be noted that other requirements may be necessary, depending on its state and operations. To be able to facilitate a successful transaction, it is necessary to perform real due diligence, considering this is the only tool that would help the buyer to have the all information at hand to make an informed decision. In addition, it helps the buyer not to run any risk or additional expenses that were not planned for in the future.

The Business Team at Outlier Legal Services is well versed in Contracts of Purchase. If you are interested in purchasing a business and require legal advice on the matter, please do not hesitate to reach out to us.

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ccastrillo@outlierlegal.com

She serves as a Business Jr. Attorney at Outlier Legal. Carolina Castrillo obtained her Law degree from the University of Costa Rica after passing her thesis with honors. She also finished an specialty in Notary and Registry Law at Ulacit and her studies in the French language. She worked at SUGESE, Magnalex Abogados and Fedefutbol. She describes herself as responsible, organized, and emphatic.

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