The Value of Full Disclosure and Honest Negotiations in a M&A Transaction

Oct 12, 2021

Outside the doors of the Basilica di Santa Maria in Cosmedin in Rome, Italy is a frieze called the Bocca Della Verita – The Mouth of Truth in English (  Legend has it that if someone puts their hand into the mouth and lies, that the jaws will chop off the individual’s hands. The concept of the importance of honesty in personal and business interactions is as old as civilization.  It was important enough that it was etched into stone as the 9th commandment provided to Moses on Mount Sinai in the verbiage, “You Shall Not Bear False Witness Against Your Neighbor”.

IBA is far younger in its presence on earth than the Bocca Della Verita or Ten Commandments having only been in existence as a business brokerage firm since 1975, however forty-six years ago the firm was founded on the following straightforward concept recognizing the value of honesty in business, as professional intermediaries IBA would always strive to facilitate transactions from a position of knowledge in an environment of full disclosure employing best practices with skill and diligence.  Over 4200 successfully completed transactions involving over 10,000 parties later, time has demonstrated that the marketplace has embraced this mission statement.

Truth is a very important, but often overlooked concept of emphasis in the business brokerage world.  The following is how the concept of honesty impacts each party in a transaction:

Seller – Mark Twain is credited with saying, “If you tell the truth, you do not need to remember anything”.  This quote is often paraphrased by IBA intermediaries when describing the sale and due diligence process to our sell side clients.  It is our goal, and hopefully that of our business owner clients selling their privately held companies and family businesses, to accurately share information with potential buyers from day one of the engagement process.  If this occurs post Letter of Intent due diligence will be a verification and not the discovery process mitigating the risk of a transaction failing to get successfully to closing.   In addition, post transaction legal liability will be significantly reduced for the seller as the most common source of post-acquisition litigation by a buyer against the seller is related to false or non-disclosed pertinent information prior to closing.

Buyer – At its core a business acquisition is an investment decision. All investment decisions should be made from a foundation of knowledge.   It is a reasonable expectation by a business buyer that the seller and their professional intermediaries are providing accurate information from which they can make a prudent decision while acknowledging the inherent risk of entrepreneurship.  If the suspicion exists that this is not the case for either the seller and/or the intermediary, it is my recommendation that a buyer walk away from the deal and find an alternative acquisition candidate.

Business Broker – Booker T. Washington famously said, “Character is Power”.  The most significant asset owned by a professional mergers & acquisitions intermediary or a business brokerage firm is their reputation.  The guiding principal for customer engagement at IBA is the “Golden Rule” or “Do unto others as you would want them to do unto you”.  It is our belief that if this is followed then positive “win-win” transactions will be facilitated.  It is also important to not sell your integrity for financial gain.  This can be a difficult choice when personal needs exist (e.g., mortgage payments, kids in college, etc.), but the short term gain will eventually have long term consequences.

I am proud to share information on two transactions I walked away from as a business broker where facts conveyed I did not want to be party to either transaction despite commission dollars on the short term horizon.  Both situations occurred during the due diligence process.  In the first situation and this does not speak well of politicians, a local candidate for mayor in a municipality had engaged my services to sell a manufacturing company.  On face value the company looked like a great opportunity for a successor with a reputation for quality products and a strong profit line annually.  However, due diligence found that this entrepreneur who owned two companies was transferring expenses to his second company making the business for sale look artificially profitable.  Both the buyer & I walked away from the deal upon this discovery.  My positive reputation intact with the buyer, he purchased another company from IBA.

The second situation involved a restaurant with “cooked books”.  I identified this situation as a seasoned intermediary before the buyer.  I told my sell side client that I was uncomfortable representing him with what I discovered and despite having a deal in escrow pending sale wanted to terminate our business relationship.  He happily allowed me to walk away without compensation thanking me for finding a buyer and taking him most of the way down the path to sale.  I also shared with the buyer that I was exiting from the transaction and did not want compensation from the deal, if he bought the company.   He asked me why and following my principle of not wanting to speak ill of others, conveyed “this deal does not feel right to me, I have questions about the business model”.   The buyer thanked me for my efforts and completed the transaction as planned.  A couple of years later the business was closed when I drove by it causing me to wonder what happened.  Several years later my question was answered when I ran into the buyer at a restaurant, he came up to me and conveyed how much he respected me and how foolish he felt for not seeing the signs in front of him when I walked away and forfeited my commission.  The short answer to why he failed was that the business model was not sustainable with the debt service he took on with a SBA loan because cost of goods were out of line due to under the table labor and food product brought in from a personal farm at no documented cost.

I have not done it yet, but I am thinking of getting a framed picture of the Mouth of Truth for one of our conference rooms.  I think it would be a positive piece of art to reference when training new members of the IBA team and for our intermediaries to share when engaging with entrepreneurs selling businesses and buyers looking to acquire them.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate  communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.