Even well-intentioned sellers are motivated to close a deal and may present information in the most favorable light. This is often a human behavioral bias, not malicious lying. Acquirers must actively challenge and validate seller statements by testing assumptions and seeking external information.
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To de-risk carve-out acquisitions, sophisticated buyers should recommend the seller commission a sell-side Quality of Earnings (QofE) report before a preliminary bid is made. A seller's willingness to invest in a QofE signals their motivation, and the report provides a more reliable financial perimeter, reducing the risk of later surprises and renegotiations.
During diligence, speak directly with the target's largest clients. You may uncover deal-breaking risks, such as a client who will leave post-acquisition because their internal rules prevent reliance on a single, monopolistic supplier, a fact you would otherwise miss.
Contrary to intuition, being transparent about a product's (or property's) shortcomings builds trust and filters for the right buyers. This prevents costly, late-stage negotiations and failed deals that arise from surprises during due diligence, ultimately speeding up the sales cycle.
Instead of walking away immediately upon finding inaccuracies, quantify the risk. Rebuild your business case assuming the worst probable scenario based on the discovered misrepresentations. If the deal remains net positive even with these new, pessimistic assumptions, it may still be a viable investment.
By proactively asking about potential deal-killers like budget or partner approval early in the sales process, you transform them from adversarial objections into collaborative obstacles. This disarms the buyer's defensiveness and makes them easier to solve together, preventing them from being used as excuses later.
Buyers are often too polite to voice concerns. To get past this, actively ask what parts of the presentation are unclear, challenging, or seem like they won't work. This "leaning into the negative" provides a library of information to tailor your next steps and address their real blockers.
Prospects often express interest to gather information but lack a commitment to solve the problem. Sellers must differentiate by probing for concrete timelines and stakeholder involvement to avoid chasing deals that won't close, rather than hoping to convert interest into commitment on the call.
When sourcing a carve-out proactively, the seller may not be fully committed. State Street recommends the seller commission a sell-side Quality of Earnings (QofE) report. Their willingness to invest in this serves as a strong signal of their seriousness and provides a more accurate financial baseline, reducing the risk of surprises during diligence.
If a deal team says, "don't bring the integration people in because they'll mess up the deal," it is a massive red flag. This indicates they are likely sugarcoating problems and painting an overly optimistic picture for the seller, virtually guaranteeing post-close surprises and failure.
Sellers fail not from a lack of confidence, but from the core belief that the buyer with the money holds the power. This mindset is reinforced because they behave the same way as buyers themselves. To regain control, sellers must fundamentally change their belief system and act as the authority in the process.
