7 Deadly Sins of Selling a Business: 7. The Seventh Deadly Sin—Failure to Disclose Problems at the Outset

After prospective buyers have been pre-screened and have expressed sufficient interest in pursuing an acquisition of the company, preliminary due diligence begins. Preliminary due diligence is a basic analysis of the company, its financial position, etc. to whatever extent permitted by time and the willingness of the owners to divulge information at this stage. Typically, the transaction advisor is able to answer many general questions that may arise. For those questions needing more detailed or technical answers, the transaction advisor conveys the questions to the owners and delivers their responses to the prospective buyer.
It is at this point that any of the company’s “warts” that have not already been identified are disclose. It is in the best interests of both the seller and the buyer to fully disclose any problems that either party may have so as not to have any surprises that may kill the deal. For example, if the buyer is awaiting the sale of real estate to purchase the business, the time factor or uncertainty thereof may be a deal breaker. Likewise, if the business has contingent liabilities or competitive or technological issues have changed the likely future performance of the company, this should be discussed at the outset so as not to lead the buyer on. This destroys goodwill between the buyer, the seller, and the transaction advisor and will likely kill the deal. After all, the information can only be suppressed for so long. Once an agreement has been reached on price and terms, due diligence begins. At this point, the acquirer has had limited access to the target company’s financial information, operations, legal documents, management, etc., which may have allowed for some information to be shielded. The due diligence phase is where the acquirer delves deeply into the financial information of the company and other aspects to ensure that the information presented thus far correctly and fairly represents the actual financial, competitive, and operational position of the company. It is during the due diligence that any of the warts not already disclosed will be discovered. Rather than waste both buyer and seller’s time and money only to find some “surprise,” it is in everyone’s best interest to be upfront at the outset to identify any potential pitfalls to successfully closing the deal.

 

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