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When You Don’t Disclose Everything There’s No Deal

Our client had a sleepy multi-generation business. Making money, not really growing, doing things the way they’ve always been done. Given the industry, we all decided the buyer had to be someone in the industry. And we found the perfect match. Dynamic company in an adjacent market that provided pretty much the same services and did five times as much business in a smaller facility with fewer people. Oh, and they offered a great price and deal structure.

Our client was a family-owned business in the true sense of the phrase. About 10 shareholders, all family, they didn’t get along, and we felt one group would do things just to spite the other group.

To compound matters, there were environmental issues because dad (long deceased) had parked junk vehicles on the back of the property.

Action Items

We massaged the buyer and seller through what needed to be done with the property, introduced the seller to an environmental consulting firm, and got the clean-up started.

As this happened the buyer’s bank, after months of stalling, decided they didn’t want to do the deal. So, we introduced them to another bank, who was quite bullish on it. We arranged a site visit for the bankers along with the buyer. It was during that visit the you-know-what hit the fan.

The Result

The bankers were touring the facility with the buyer when one of the officers of the company pulled us into a conference room. He told us they had received a letter from the EPA requiring a mitigation and preventative actions for runoff from the shop. When asked, he went on to say there was an EPA inspection during the prior year. The exact time was one month before the buyer’s due diligence list was received and it specifically asked twice about any EPA contact.

End of deal. The cleanup and prevention wouldn’t be a huge cost and wouldn’t take much time. But all trust the buyer had in the seller was gone. Fast forward three years and the company hadn’t sold. It was a tough sell, finding a buyer in the seller’s industry for a company their size.

The lesson is, when selling a business, it’s open kimono, all the time. Even if the deal closed there would have been lawsuits. The seller would have lost, the attorneys would have won, and the buyer would have their costs reimbursed but have a distracted management team.