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M&A Negotiating Tactic #1 – Honesty

The ancient Greek storyteller Aesop once wisely proclaimed, “Honesty is the best policy.

At Morgan & Westfield, we firmly assert, “Honesty reigns supreme as the #1 asset in M&A transactions.”

Is it conceivable to shroud a few imperfections within your business from potential buyers during the sales process? Can you get away with concealing critical information that should be disclosed? What happens if these facts surface after the deal has closed?

In the realm of merger and acquisition (M&A) transactions, the value of honesty cannot be overstated. Trust forms the bedrock of a successful business sale, and the most straightforward way to establish trust is through unwavering honesty in all your interactions with potential buyers.

For any buyer, acquiring a business is inherently risky, and the perceived risk directly impacts a business’s value.

When a buyer doubts your integrity, they might mitigate their risk by:

  • Strengthening representations and warranties.
  • Structuring a portion of the price as an earnout or a promissory note, potentially subject to a right of setoff
  • Increasing the depth and duration of due diligence.
  • Negotiating a lower purchase price (commonly known as re-trading).
  • Requesting credit or background reports on your business.
  • Altering other critical transaction terms, such as seeking permission to engage with key customers or employees, even if they initially agreed not to do so.

In the world of M&A, honesty isn’t just the best policy—it’s the ultimate strategic weapon, allowing you to build trust, maximize value, and facilitate smoother transactions.

With this in mind, we delve into the following pivotal questions in this article:

  • How can you mitigate the perceived risk associated with your business, making it more enticing to potential buyers?
  • What strategies can accelerate the often time-consuming due diligence process?
  • When is the optimal moment to disclose critical facts?
  • Is it advisable to employ hype as a tactic?
  • How can you spotlight your business’s potential without resorting to exaggeration?
  • Does the mode of communication, whether oral or written, make a significant difference?

Embracing honesty not only conserves your valuable time but can also enhance your business’s overall value. Furthermore, it has the potential to streamline the buyer’s due diligence efforts and foster smoother negotiation processes.

Consider this advice an invaluable asset to your endeavors. Here’s how:

Why Honesty is the Best Policy

Increase the value of your business by reducing the perception of risk.

An honest individual not only earns the respect of all parties involved but can also elevate the worth of your business. Transparency, by diminishing the perceived risks, can render your business a more appealing prospect for potential buyers. Embracing honesty can effectively lower the buyer’s risk perception, potentially motivating them to offer a higher price for your business.

Save yourself time and stress by embracing honesty from the outset. Honesty eliminates the need to juggle half-truths, granting you the freedom of transparency.

Furthermore, honesty upfront can streamline the buyer’s due diligence process, reducing the intensity of their scrutiny and minimizing the risk of re-trading. When you speak the truth, there’s no need to remember what you may have said, making the entire due diligence phase significantly less taxing.

Attempting to conceal material facts during a business sale is a challenging task. The lengthy nature of the process, coupled with diligent buyer investigations, makes it highly improbable to hide significant information indefinitely. Sophisticated buyers are thorough in their due diligence, making it likely that any undisclosed material facts will eventually come to light. When a buyer uncovers undisclosed information, it can lead to unfavorable changes in the transaction’s terms.

Buyers have options for recourse due to reps & warranties.

As a seller, it’s important to recognize that your responsibilities don’t simply end at the closing of the deal. Buyers often incorporate safeguards like representations and warranties in the purchase agreement, which means your exposure can extend for years.

If a buyer uncovers a significant misstatement, even after the transaction has concluded, they may pursue damages in accordance with the representations and warranties you agreed to in the purchase agreement. Even more concerning, they could potentially offset any payments owed to you through a set-off arrangement.

Trust makes negotiations easier.

It’s highly probable that you’ll maintain a relationship with the buyer post-closing, whether it’s short-term or long-term. Building trust through honesty forms the bedrock of this relationship, and, frankly, it’s much easier to negotiate with a friend than an adversary.

Drawing from personal experience, I can recount numerous transactions where the buyer expressed their trust in the seller, leading to an expedited due diligence process and a swift path to closing. Sellers, too, have echoed similar sentiments. It’s indeed refreshing when a seller places their trust in a buyer and forges a strong rapport. When such trust exists, sellers often feel more at ease sharing sensitive information during due diligence, ultimately speeding up the entire process. And this trust, honesty, and transparency are the cornerstones of building a solid, enduring relationship.

Consider putting yourself in the shoes of the other party. Who would you feel more comfortable writing a $10 million check to?

  • Vinny, a shady, unscrupulous business owner who paints an unrealistic and overly optimistic picture of his company’s future, claims that revenue could magically triple in three years with minimal effort, and attempts to conceal significant material facts while dodging straightforward questions?


  • William, a forthright and trustworthy business owner who voluntarily acknowledges his business’s weaknesses and consistently provides honest answers to inquiries?

Here’s how William and Vinny might respond to a few scenarios:

Scenario 1: “What was your revenue last year?”

William: “$7.3 million.”

Vinny: “Well, you shouldn’t focus on the numbers. Let me give you the true narrative behind the figures. First of all, there’s a substantial amount of cash involved (wink, wink) in the business.”

Scenario 2: “Who is your top competitor?”

William: “KidsExchange — they’re a great company. I know the owner, and they excel in a few areas. However, we believe we have a major advantage with our return policy. If customers aren’t satisfied, they can easily return their purchases, and we…”

Vinny: “Haha, we don’t really have any competitors.”

As a buyer, all other factors being equal, who would you prefer to do business with? Transparency and honesty can undeniably make a significant difference.

Lower perceived risk means your business is worth more.

Honesty plays a pivotal role in diminishing a buyer’s perception of risk, ultimately leading to an increase in the value of your business. But how do buyers evaluate risk? They employ a blend of legal, financial, and operational due diligence, combined with their gut instincts.

It’s worth noting that the reliance on “gut feel” varies among different buyers:

  • First-Time Business Owners: For individuals who have never ventured into business ownership, fear tends to be the most prominent factor that can hold them back. These buyers heavily rely on their intuition, and if the seller doesn’t instill 100% confidence, they’re likely to vanish swiftly.
  • Experienced Business Owners: Those with prior business ownership experience are generally more open to taking calculated risks. However, even they remain sensitive to any hints of untrustworthiness from the seller. If they detect anything less than complete forthrightness, they might introduce safeguards in the purchase agreement or transaction structure or inundate you with due diligence requests.
  • Financial Buyers: Financial buyers are a sophisticated bunch, often having completed numerous transactions. They possess finely honed character judgment skills cultivated through extensive experience. These buyers excel at identifying any signs of untrustworthiness. It’s essential to adapt your communication style when dealing with different buyers, but remember that honesty is non-negotiable, regardless of your audience.

Tips for Using Honesty and Disclosure to Build Trust

Voluntarily disclose material facts as early as possible in the relationship.

This provides you with a chance to proactively address any issues before the buyer stumbles upon them. Taking this approach empowers you to take the initiative, while opting for a defensive stance often leaves you at a disadvantage, regardless of the validity of your standpoint.

Anticipate what the buyer will ask and disclose it before they ask.

This provides you with a chance to present the situation in your own terms and fosters trust. If the buyer discovers a significant fact before you reveal it, it could lead to a loss of trust that may take weeks or even months to rebuild. Complete disclosure, on the other hand, averts this risk and strengthens trust.

Avoid hype, boasting, and exaggeration — or attribute it to someone else.

If you want to express positive viewpoints about the state of your industry, it’s essential to do your homework. Locate articles authored by reputable sources and present them to the buyer. If a note of caution is warranted, for instance, if an article appears overly optimistic, don’t hesitate to mention it. Providing your balanced perspective will earn the buyer’s respect.

Plant individual seeds of optimism, but let the buyer form their own narrative.

Provide the raw data through third-party sources, as discussed earlier, allowing the buyer to form their assumptions as the foundation for any projections. In essence, show the buyer where the ingredients are in the kitchen – the tortillas, beef, lettuce, and cheese – but let them craft their own burrito. Offer the buyer the facts, enabling them to tailor these to their specific needs, preferences, or tastes. Their conclusions will carry greater credibility and personal meaning than any assumptions you might spoon-feed them.

  • Wrong: “If we introduce our new product ‘XYZ’ to the marketplace, it will generate $20 million in revenue.”
  • Right: “There are approximately 500,000 potential customers for XYZ, and we’re considering a price point around $500. Industry standards typically see an 8% market penetration. Currently, the product is undergoing user testing, and production is expected to commence in 90 days.”

Comment: Most buyers will instinctively run the numbers themselves, often during the conversation. I found myself doing the math as I was writing this. It’s a natural tendency for business professionals. In this case, 500,000 potential customers x 8% market penetration = 40,000 customers x $500 each = $20 million in revenue. There’s a significant difference between the two approaches, especially if you guide the conversation to prompt the buyer to extract the raw data from you.

The key is to encourage the buyer to inquire about the ingredients and let them create their own recipe. For instance, if you mentioned a new product in development:

  • Buyer: “What do you anticipate pricing it at?”
  • You: “Around $500. It seems there’s a substantial market for this.” (Your response is intentionally vague, designed to prompt the buyer to seek specifics.)
  • Buyer: “Interesting. How large is the potential market?”
  • You: “The ABC Association estimates it at 800,000 potential customers for XYZ, but that might be overly optimistic. I’d say 500,000 is a more realistic estimate. However, that’s just the potential market – actual market penetration would likely be lower.”
  • Buyer: “What kind of penetration are you envisioning?”
    (You’re teasing the buyer, aiming for them to ask follow-up questions about the key assumptions they can use to calculate potential outcomes.)
  • You: “Well, the EFG product managed a market penetration of 14%, but I believe 8% is a more conservative estimate.”

Note: In this scenario, you leverage two innate human characteristics: curiosity and the desire to capitalize on opportunities before others (commonly referred to as the fear of missing out or FOMO).

By tantalizing the buyer with information, you encourage them to seek specifics. They may then conduct calculations themselves, often employing more optimistic figures than you initially provided. Ultimately, whose projections are the buyer more likely to trust – yours or their own?

Focus on building a strong relationship.

Prioritizing the establishment of a robust relationship can significantly streamline the entire transaction process. Understand that each buyer may have varying perspectives on the significance of this relationship, so it’s essential to adjust your approach accordingly.

Put your best foot forward.

Highlight the favorable aspects of your business, but ensure a well-rounded discussion by addressing any potential drawbacks. As an entrepreneur, optimism often comes naturally, but it’s crucial to complement it with a dose of realism. Embrace humility when the opportunity arises, as it serves as a powerful tool for fostering trust.

Be careful with unscrupulous buyers.

Adapting your stance and communication style may be necessary depending on the type of buyer you’re negotiating with. If you’re unfamiliar with M&A negotiations, it’s wise to seek guidance from an advisor. A seasoned advisor can discern when a buyer is being assertive or exploiting the seller. It’s crucial to recognize when to adjust your approach to match the buyer’s tactics and when to stand firm. Some buyers employ a win-at-all-costs strategy, making their aggressiveness quite evident. Others may take a more subtle approach, concealing their true intentions while leveraging your honesty. In such cases, maintaining a firm yet respectful position is key. If you lack experience in this realm, consider enlisting the expertise of a professional advisor.

Be careful what you put in writing.

Limit written communication to verifiable facts. Any subjective information should be conveyed through phone calls or face-to-face meetings rather than in written form. Your confidential information memorandum (CIM) should provide a meticulous analysis of your business and industry, potentially containing definitive statements about the industry’s current status and growth prospects. This document will undergo thorough scrutiny and refinement by your team of advisors, including your attorney, CFO, M&A advisor, and others, before it’s shared with a buyer. Be cautious when creating any spontaneous representations or documents; adhere strictly to the facts. If you want to embellish the facts, do so verbally. Always consider that anything put in writing could potentially be used against you in a legal context, particularly in the event of business failure or material misstatements post-closing.


The saying “Honesty is the best policy” holds true, especially in M&A transactions. The most powerful tool when selling your business is straightforwardness.

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