Story Three – “Pencils down… we’re off”
An owner-client; an employer of a professional, qualified management team, engaged our firm to sell his business. During our own “Discovery Process” we found reason to question a number of financial and non-financial items – including stock and WIP, the legal existence of claimed IP. Despite our belief that some issues “didn’t stack up”, we had to accept the word of the management team that there were no issues. We duly presented the business to the market, and negotiated prices and terms with a prospect buyer and the sale went to contract.
All was moving along swimmingly until the due diligence team also questioned the same elements we had. However, this time, the owner’s team had to confront the fact that errors did exist and together we spent a long and hot evening forensically looking for – and finding, a series of journal errors.
The prospect purchaser for that business didn’t want to “resolve” the issue, nor understand where and why the errors occurred. Nor did we manage to “renegotiate the price” in good faith.
The fact was, with our credibility destroyed – no good faith existed from that point. We received a phone call that morning informing us that the due diligence team had been disbanded and would not be returning. The deal was lost because the buyers trust had evaporated; they could not be sure what else we were hiding.
Those errors lost a sale and cost the business owner approximately $1.5 million.
There are a finite number of ratios and key indicators that are used time-after-time. They can be described as a subset of the more formal elements found in the “due diligence” processes applied in large deals.
This is not an isolated story; this scenario frequently happens – Far too many sales are lost after the agreement is made and prior to settlement. You must know your numbers are right.
