How to do Deals in Latin America

International deals are one of the most challenging transactions to execute. Aside from the complexities of M&A, there are additional hurdles that acquirers must overcome to successfully acquire companies overseas. In this article, we will focus on how to do deals in Latin America and all the challenges that come along with it, featuring Juan Guillermo Castaneda, Senior Advisor to SKG CEO.

“If you are willing to acquire the target company, it’s because you found something good. And that good was built for the team that they have. So it’s critical that you maintain their team as much as you can and integrate them into your team.” - Juan Guillermo Castaneda

M&A in Latin America

According to Juan, M&A in Latin America is mostly around mid-sized, family-owned companies. Just like anywhere else, medium-sized companies come with a lot of inefficiencies as their processes are not refined, like their accounting practices which usually don’t have IFRS accounting standards.

What makes it even harder are the regulations that differ from country to country, and companies handle them very differently compared to the United States. Here are some of the most common ones.

‍

1. Labor Regulations - Brazil, in particular, has very rigid regulations when it comes to labor management. And companies there have schemes of compensation that will not be acceptable to multinational companies. 

2. Tax Regulations - Tax laws are different from the United States, and most companies have big tax liabilities either with the state or the federal government. Owners do not see it as a liability, but rather as a part of their day-to-day operation in handling taxes. Hence, it will not be recognized as a price adjustment during negotiations.   

3. Environmental Regulations - Environmental regulations can be pretty standard, but company compliance is very low, and it is usually not aligned with what’s written on paper.

4. Property Regulations - Most people didn't follow the proper procedures or find the proper titles when acquiring properties. 

In Latin America, locals are more comfortable operating under gray areas. However, these practices cannot be absorbed by public companies and must be adjusted, which translates to complexities. 

To mitigate these risks, acquirers need local people to help out with due diligence. They can also find experts with good reputations via referrals from good US lawyers. On the accounting side, using the big four firms is always advisable. 

Sourcing 

Since the majority of transactions in Latin America are of medium scale, buyers typically don't engage the services of bankers. Most deal sourcing is from a direct approach, with the buyer finding the decision maker and discussing potential synergies.

According to Juan, everything will be easier if the buyer has a good reputation. A good reputation can create curiosity, instantly opening the door for conversations. If a company doesn't have a good reputation, it becomes nearly impossible to make successful deals.

Integration

Due to massive differences in culture, retaining every acquired employee is ideal to increase the chances of success. It is crucial to have good people that can maintain and grow the business. However, there are limits to what local people are willing to do because they are accustomed to their way of working. Acquirers must be flexible and balance both worlds.

The key is to communicate and manage expectations on both sides. Buyers must have a clear understanding of what they want from the business, and communicate that to the acquired team. They also must set realistic expectations and have proper-follow up. Establish a timeline for addressing issues and work with the team to adapt to new standards.