Every buyer needs to know a company’s real situation via an auditing process. It is vital that this process covers the financial aspects as well as the legal aspects, labor aspects, etc.
We are talking about the due diligence process that any sensible person will complete before buying a company.
Traditionally, the buyer conducts due diligence after their conditional offer has been accepted. It usually takes between 4 to 8 weeks.
Due diligence will uncover any lies, and the deal will fall apart.
We had a sell-side mandate from a publicity company and our client told us that he had contracts signed with all his clients. The information memorandum presented to the foreign buyer reflected this. When the buyer completed the due diligence they discovered that there were no such contracts. This resulted in a lack of trust on the behalf of the buyer and they lowered his offer. Our client explained that signing contracts was not customary. He used verbal agreements renewed each year, as shown by his long-standing clients.
What might not be relevant if explained from the very beginning can become relevant if the information passed on isn’t exactly true, causing mistrust on the side of the buyer.
The results of the due diligence can be an important tool for verifying if the offered price is adequate and the buyer often uses the results as a negotiating tool for price and contract terms.
Sometimes, the seller isn’t aware of his own problems until the buyer discovers them in the due diligence.
Once, we advised a multinational and made an offer to buy a company. The seller claimed they had no debt, and the buyer agreed on a price based on that claim. However, due diligence showed that the company had, in fact, received reverse factoring of 4 million dollars, which meant bank financing. In other words, the company was in debt. The CFO insisted it was not debt and required proof to confirm it as debt. By that point, the seller already had an amount in mind and any lowering in price, as he saw it, would ruin the transaction. Both parties were unaware of this problem and had agreed on a price that was now impossible. In short, there was no reduction, just a misunderstanding or, in this case, maybe a concealment of the truth.
As he will be spending money, the buyer usually asks for exclusivity during this period and it is normal for the other party to agree. The seller maintains negotiations with only one buyer, running the risk of losing all other potential bidders. Therefore, never lie to a potential buyer, you will only be damaging yourself.
This article was written by Enrique Quemada, chairman of ONEtoONE.