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3. Failing to cooperate with the buyer.
Sellers sometimes hesitate to provide a piece of information to the buyer. Worse yet, a target might outright refuse to provide information or access to management or production facilities. The desire to hide something is often based on the assumption that the issue, whether financial, legal, or operational, will kill the deal.
Yet, this lack of cooperation raises a red flag to buyers and can became a deal breaker. An acquirer expects a target to have issues. The issue that you are trying to hide might not be a deal breaker. But the fact that you are hemming and hawing might cause greater concern than what you are hesitating to reveal.
Trying to hide something from the buyer is a futile exercise. If the deal closes, the buyer will find out about any problems and you will take a hit through the escrow or the earnout.
So long as the request does not ask for a trade secret (think the formula for Coca-Cola), and is not unreasonably burdensome, you should comply with due diligence requests. There are other limited exceptions, but not very many. The tone of the buyer’s due diligence should not overly aggressive. If it is, that may portend your future relationship with the acquirer.
4. Failing to clear disclosures with your attorney.
Before you hand over sensitive information, make sure you consult your mergers and acquisitions attorney. Disclosures should comport with the terms of the Non-Disclosure Agreement between you and the buyer. You should expect to give out some sensitive information. There are limits though. For example, you don’t want or need to hand over your entire customer list. Telling the buyer that your top three customers account for 25% of your sales is sufficient. You can redact documents as appropriate, but first build that into the Non-Disclosure Agreement.
Don’t give away a trade secret. It is enough that the acquirer knows you have one. Telling the acquirer is not worth the risk that the deal will fall through and that the buyer will steal the trade secret. It is better to avoid litigation than to expose yourself unnecessarily.
When in doubt, ask your attorney.
Conclusion
Due diligence can be challenging for sellers because of the litany of requests received. By understanding the points of risk and what buyers will ask, sellers can avoid common due diligence mistakes during the sale of their company.
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