Every buyer needs to know a company’s real situation via an auditing process and 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, due diligence is done by the buyer once his conditional offer has been accepted. It usually takes between 4 to 8 weeks.
If you lie, it will be discovered during the due diligence 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. This was reflected in the information memorandum that was presented to the foreign buyer. When the buyer completed the due diligence they discovered that there were no such contracts, resulting in a lack of trust on the behalf of the buyer and they lowered his offer. Our client tried to explain that it was not customary to sign contracts, they were verbal contracts that were renovated every year and the proof was that the clients had been with him for many years.
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 to have no debt and a price was agreed on this basis. 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 that it was not debt and that it had to be proved to be 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 were also set 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.
Book: How to Maximize the price of my company