“O what a tangled web we weave when first we practice to deceive!” goes the old adage from the poem Marmion by Sir Walter Scott. It pertains to the perils of deception, but it is equally applicable to pitching a company to potential buyers. Of course, we are exaggerating to make the point when we imply that owners blatantly deceive buyers. With all this said though, owners want to present their company in the best, most positive light; however, there is a fine line between promoting a deal to make it attractive to would-be buyers and half-truths, inuendo, and the subtle exclusion of relevant details about the company that creates an incomplete or false perception about the company, resulting in a pitch that does not match the reality.
We alluded to this in thewhen we cited an example of a recent acquisition engagement. To recap: based on the pitch, the transaction seemed to be the “holy grail of deals.” However, when we dug in and started due diligence, we discovered that the perception created by the owner did not hold up during diligence. The company had a host of problems including inaccurate financial statements, customer concentration, and supplier issues. In short, after pulling back the curtain, we quickly realized that the pitch was far more appealing than the company itself.
That is the nature of a pitch — to garner buyers’ attention and draw them in for a closer look.
It is actually a bit like fishing. The seller throws out a pretty, shiny lure and hopes would-be buyers are tempted by its sparkle and sheen to take the bait and want to learn more about the opportunity. The problem is making sure the shiny lure — the pitch — which may look enticing from afar, is not actually a rusty, faded red herring when buyers get up close.
There’s the pitch, and then there’s the “rest of the story,” which often becomes exposed in diligence or even earlier by asking the right questions. Like “successful investors” who tout their winning investments but never mention the losers, some owners may make their pitch by selectively weaving in the many good aspects of the company while leaving out or minimizing the less-than-ideal ones. However, while the owner may be tempted to gloss over some of the weaker characteristics of the company, careful buyer diligence almost always prevails since buyers are smart and have a hoard of advisors available to investigate every facet of the company.
Failing to disclose early on key facts about the company and/or glossing over some of the company’s weaker characteristics has a number of consequences including rattling the buyer’s trust, making the buyer wonder what other important facts about the company were not disclosed, and creating the strong potential for a busted deal. And buyers tend to get angry when they discover a deal is too far astray from what they were led to believe.
Moreover, creating an inaccurate perception of the company often results in an opportunity cost for both the buyer and seller in terms of time that could have been spent on other deals/buyers, as the case may be. The buyer may also take a financial hit, depending on how much money they spent on diligence at the time they decided to stop pursuing the transaction.
It is also worth noting that companies that are consistently misrepresented tend to get tossed around from buyer to buyer. After many failed sale attempts, these companies often become “cocktail party chatter.” Everyone has seen the deal, the company’s reputation becomes tainted, and no one wants to touch it because many buyers have been lured in and ultimately disappointed. An owner whose company becomes “cocktail party chatter” eventually has a difficult time getting any buyers interested because of its history and reputation. The owner may need to stop trying to sell the company for several years until memories fade and the owner takes the steps to transform the business into a more salable asset.
Finally, bankers who work on these types of transactions or fail to undertake their own thorough diligence on the company risk tarnishing their reputation. Buyers do not want to work with bankers who have a reputation for over-promoting their deals or that do not “know” their clients. It may even reach the point that buyers do not want to see acquisition opportunities from those bankers. Of course, that is a bad outcome for bankers, particularly when they find themselves in a “boy who cried wolf” situation, where they are representing an excellent company, but no one believes them because of their reputation.
To reiterate, owners have an obligation to present their company to buyers as accurately as possible while putting their best foot forward. However, they need to balance highlighting the company’s strengths while managing its weaknesses. When pitching a company for sale, half-truths indeed create a tangled web that can send buyers running for the hills and leave the seller struggling to understand why no buyer wants to acquire their “great” company. In short, an over-the-top pitch — where the perception does not match the reality — often results in a busted deal. And that’s the rest of the story….
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