In Deal Note® 201, we discussed that the Confidential Information Memorandum (CIM) is a disclosure document. In Deal Note® 240, we explained why the management deal team should be an integral part of drafting the CIM. This week, we look at the issues buyers will dig into and why the seller should disclose them first.
No company is perfect. Every business has areas where buyers may have due diligence concerns, and most sophisticated buyers in A&D will find them. The key question is not if or what, but who finds them first.
We have seen it many times. A buyer submits a strong Letter of Intent (LOI), exclusivity is signed, and weeks into diligence the buyer’s due diligence team finds an issue no one has discussed: a key contract up for rebid, excess inventory not yet reserved, the recent exit of a key employee, an environmental spill, a customer audit that had findings, or incomplete CMMC compliance. These issues are usually manageable. The timing is not. With exclusivity signed, the seller has lost its leverage, and a late surprise becomes a reason to re-trade the price, add an escrow, or walk away.
The best time to disclose these potential buyer concerns is in the CIM. For each potential area of buyer concern, note the issue, assemble the supporting facts and documents, and disclose it in the CIM. This enables you to control the narrative. This is not a confession. It is not a statement of guilt. It is a balanced disclosure of the realities of your business, with its many great attributes and its factual imperfections.
When a buyer raises a due diligence issue that the seller has already disclosed, the issue shrinks and the seller’s credibility grows. Conversely, when buyers “find” problems post-LOI, they often use them as an exaggerated excuse to renegotiate price or demand more aggressive terms and conditions.
If you have a question about this Deal Note® or have a topic you would like us to write about, please don’t hesitate to let us know.
William Alderman
Founding Partner
