Word to the wise: if you want to buy a turnkey business in Brazil, do not make the mistake of going it alone. This advice is even more relevant for acquisitions involving businesses with employees as Brazil strictly enforces its labor laws. Consider the following outcome of a business deal where legal troubles quickly ensued, catching the new business owners unaware that they were on the wrong side of Brazilian law.
1994, Pernambuco
Business partners purchased a pharmacy chain and soon found themselves sued by former employees. Lacking payroll records in the acquisition, the new owners were uninformed that the previous owners owed hundreds of thousands of reais in back pay for overtime and holidays. It took 17 years to reach a settlement. During that time, the court froze the bank accounts of the pharmacies, resulting in the new owners having to close every store.
The Fallout
Many in the business sector would like to see reform in Brazil’s labor laws. Many business owners consider the laws a burden too difficult to bear. However, when job growth is up and business is booming, the potential cost of firing a worker becomes less of a priority. Even if both parties, employer and employee, wish to negotiate the terms of the employment, current labor laws prevent this in many cases.
With the current labor laws favoring employees, there is an economic incentive for employees to get fired rather than resign. This is why many former employees with a grievance take their argument to court. In the case of potential business acquisitions, investors need to know exactly what the potential liability is before closing the transaction.
Minimize Risk
There is always risk involved when buying a business. The goal is to minimize the risk as much as possible. Effective legal counsel can help you do this by conducting due diligence and carefully drafting the transactions documents. It is also advisable for the buyer to maintain a good relationship with the seller. The stronger the relationship between the buyer and the seller, the easier it will be to resolve potential problems down the road.
