16th December 2017
We are currently engaged with buyers for a site which our investor owns. This deal was done in a way which goes against the grain of the way most transactions in the industry happen; you could say we put the cart before the horse.
Normally, in a transaction, you are told some prima facie information about a property, you then have a look at the property. If you decide to purchase it, you agree the price and then the matter is placed in the hands of the lawyers to get on with.
However, what normally happens with the majority of buyers, is that this is when the real due diligence starts. Certainly, from a legal perspective, the information has to be extracted by a lawyer and often from a lawyer, therefore, they are needed for this aspect of the deal. After the deal has been agreed, a valuation will normally be instructed and any issues will come out in a report, depending on the type of report carried out. There will also be extensive corporate due diligence carried out, if one is purchasing a company. It is at this point the buyer will become more conscious of the potential tax liability and so forth.
The word inertia is an interesting word, it means the tendency of an object at rest to remain at rest unless acted upon by external forces. This can be observed in many buyers too. Buyers tend to be passive and tend to follow the normal flow, where a problem is only addressed when it floats to the surface, instead of flushing all the issues out from the outset.
The real DD happens after the deal has been agreed and it’s in lawyers hands. This means money has started to spill, and the clock is ticking. You could end up with no property and a big fat bill.
There is no reason why this cannot be done in advance of the deal even being agreed. Which is exactly what we decided to do after having experienced a buyer who had the money, had been buying, and for who we had taken references. However, he didn’t do the due diligence in regards to the commercials of the deal or the potential tax liability within the company he was buying. When this surfaced he used this issue to try to chip the price down, without even taking the trouble to understand this was actually a non issue, if he had analysed the cash flow of the numbers.
This led us to ensure the full information was made available, from a planning, legal and corporate view point; for anybody who had provided proof of funds, and where we were convinced we were dealing with the principals or authorised agents only. This reduces the probability of aborted sales, and ensures buyers are coming in with their eyes wide open. Agents in general will not do this as it requires knowledge in all three departments. Instead they prefer to get the deal agreed, and let the information surface later.