Full Disclosure Is the Best Policy When Doing an M&A Deal
One of the biggest mistakes made by Sellers in an M&A deal is thinking that it is the Buyer’s responsibility to discover any problems with the business. It is not. The Seller is obligated to disclose what she knows about the business to the Buyer. Not doing so creates an atmosphere of mistrust, at the very least, and may be illegal.
Disclose all problems in the financials
Sellers, sticking your head in the sand and hoping the Buyer doesn’t discover discrepancies or problems with the books isn’t a realistic approach. Buyers hire accountants and auditors to pore through a Seller’s financials, and those folks will discover problems.
Worse for Seller, Buyer is then in control of how to use that information to her own benefit. As Seller, you’re far better off to own up to problems in the financials and share that information with Buyer. This enables you to control the situation and frame the argument.
Never withhold material information in an M&A deal
Material information is any bit of information such as a lawsuit, an environmental problem, the loss of a large client, and so on, that has a substantial impact on the company. Failure to disclose material information means Seller is acting in bad faith and is effectively deceiving Buyer through the omission of important data.
If you offer to pay $300,000 for a home and subsequently discover the house is missing the furnace and half the windows are broken, you’re probably going to rethink the offer price. You may even walk away from the deal. The same goes when buying a company.
Seller is obligated to inform Buyer of all material events.