The Peruvian economy has grown rapidly in the last decade, with an above average increase in GDP in comparison to other Latin American economies. FocusEconomics forecasts GDP to increase by 3.8% in 2019. Moreover, the country continues to see increases in investor confidence. Peru’s attractive business environment has encouraged foreign companies to set up their businesses and conduct commercial operations in the region. In the same vein, many Latin American countries realize the need and importance to attract foreign investment as a method of economic stimulation and growth. This can be done through a number of methods such as lowering taxes and offering labor incentives. In fact, Peru established the Comisión de Promoción del Perú para la Exportación y el Turismo (PROMPERÚ) to encourage trade, commerce, and tourism – with much success, and highlight the government’s dedication to promoting the region as ‘open to investment’.
The Peruvian market of FDI (mergers and acquisitions, greenfield strategies) continues to grow. As foreign individuals and companies enter the Peruvian market, it is necessary to comment on the importance of carrying due diligence as a way to mitigate business risk.
Doing Business in Peru – What is Due Diligence?
Due diligence is defined as an investigation into a business or person before a commercial contract in signed. Due diligence can be a useful resource to ensure that your business risks are managed.
Due diligence may be appropriate in any number of situations in Peru, including when a company is interested in acquiring or investing in another company (especially when financial transactions involved in these investments are large) or when a foreign individual is looking to partner with a local Peruvian to conduct commercial operations. Due diligence can be performed with the assistance of a specialized third party, who has local due diligence experience in the Peruvian market.
In Peru, through conducting a thorough due diligence report, one can be sure that their investments are safe and they are making the ‘correct decision’, through having a comprehensive understanding of what they are getting themselves into. See below additional information regarding due diligence, and how it can be beneficial to your Peruvian investment:
- It can give an overview of the company being invested (shareholders, the board of directors, debts, liabilities, criminal records etc)
- It can help you to understand the history of your future Peruvian business partner/s.
- It can analyze the financial, operations and commercial activities of the specific person or business.
- It can play a key role in negotiating the right value of commercial contracts for both parties.
- It can assist to minimize potential labor penalties.
Different Applications of the Due Diligence Process
The process usually starts when two parties reach a commercial agreement. There are various types of due diligence, which include the following:
- Legal – a check of the legal status of the person or company of interest. This can include things such as criminal history, financial information, existing commercial contracts, debts etc.
- Labor – analyze the current labor legislation. Among others, it involves a check for anything involving labor organizations, compensation systems, and collective agreements. It contains information relating to individual employment contracts.
- Financial – financial opportunities and viability risks are measured. It can include cash flow documents, indebtedness, potential investments, and other financial services.
- Fiscal/ tax information – evaluation of the company´s tax compliance issues, subdivisions and tax administration history.
- Environmental – it foresees the potential environmental risks. Proper assessments can avoid potential environmental liabilities.
- Commercial – involves the analyses of the competence and other commercial dynamics of a specific sector. Unlike financial due diligence, it gives an extensive overview of the internal and external environment.
- Intellectual property – checks and reviews the ownership and license rights of a company´s intellectual property to evaluate the deal correctly. It can assess how intellectual property is captured and protected.
- Insurance – evaluates historic, current and future risk exposures and insurance costs. It involves a review of historic claims and liabilities and can quantify contingent liabilities.
A thorough understanding of potential business opportunities before making an investment in Peru is vital. However, being able to effectively manage business risks is just as important.
Making the decision to do a proper background check and engage a trusted due diligence provider will be advantageous to individuals or businesses large and small interested in beginning operations in Peru.
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Peru is a perfect destination to expand your business into. Companies from around the globe have seen first hand the benefits that investing in one of the fastest growing economies in Latin America can bring their business.
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