Negotiating Post Due Diligence

by Arnold Pierce Kelsey 11th of November, 2024

Negotiating Post Due Diligence

Negotiations in the realm of business transactions can be a delicate and complex process, often requiring meticulous attention to detail and strategic thinking. While the art of negotiation is essential in securing a favourable deal, it is equally crucial to ensure that due diligence is conducted thoroughly and accurately.

The due diligence process is an indispensable component of any transaction, as it provides both parties with a comprehensive understanding of the business’s financial, operational, and legal standing. This critical step in the deal-making process allows both buyers and sellers to make informed decisions and mitigate potential risks.

However, the due diligence process is not without its challenges. Miscommunication, misunderstandings, and misinterpretations can arise, potentially resulting in disputes and delays in the transaction. It is the business broker’s responsibility to navigate these challenges effectively and ensure that the deal proceeds smoothly.

The aforementioned is a real example:

In the early stages of a new financial year, I had successfully secured a contract for the sale of a business. All negotiations had been completed, and all conditions had been agreed upon. As per standard practice, the contract was subject to due diligence.

A few days into the due diligence process, I was contacted by the buyer’s accountant, who was conducting the due diligence. He advised that there were no issues, except for a discrepancy in the last financial year’s figures. The figures we had provided to them were significantly different from the tax return submitted to the ATO. The difference was substantial, amounting to three hundred thousand less in profit.

The buyer became irate, accusing the seller and me of attempting to manipulate the figures to secure a better price. I managed to calm him down and assured him that I would investigate the matter further and provide him with an update.

At first, I was perplexed, as the figures we had submitted came from the accountant themselves. However, upon closer examination of the ATO return, I realized that the discrepancy was due to the difference in accounting basis.

The original figures we had been provided were based on an accrual basis, while the ATO return was on a cash basis. The difference in profit was, in fact, accounted for in full by this discrepancy.

The buyer threatened to terminate the contract, but after a lengthy negotiation he agreed to move forward but with a $300,000 reduction off the contract price.

After more negotiations, I was able to convince him that the requested discount was not reasonable. The purchase price had been based on the average of the past three years’ profit, as well as the value of the plant and equipment and goodwill. If we averaged the requested discount over the three years, it would only result in a $100,000 reduction in the agreed purchase price.

I was successful in convincing both the buyer and the seller to accept this revised agreement, and the sale proceeded as planned, at a slightly reduced price of $100,000.

This instance underscores the importance of effective communication and the business broker’s ability to navigate the nuances of the due diligence process.

By remaining calm, gathering all necessary information, and providing a clear and concise explanation, I was able to swiftly resolve the issue and preserve the deal.

In the realm of business transactions, the business broker/negotiator who is adept at navigating the due diligence process will ultimately emerge victorious. By being attentive to detail, maintaining open lines of communication, and demonstrating a profound understanding of the financial and operational intricacies of the business being transacted, business brokers can successfully navigate the challenges that may arise during due diligence and ultimately secure a favourable deal for their clients.

In conclusion, due diligence is an essential component of any business transaction. As such, it is imperative for business brokers/negotiators to approach the process with a meticulous eye for detail, a clear understanding of the financial and operational complexities involved, and a commitment to open and transparent communication. By adhering to these principles, business brokers can effectively manage any challenges that may arise during the due diligence process and ultimately secure a successful deal for their clients.

Tags: buying business owner small business tips