Too Good To Be True

Over an informal lunch, a client informed us that he had been granted an exciting, not-to-be-missed, one-time-only opportunity to buy over a rival company. Our client considered this an excellent offer as it would enable him to acquire the rival’s clientele and expand his business. He had already negotiated the price and was on the verge of inking the deal.

Being lawyers, we offered to “check out” the target company; and advised that a routine risk management measure would entail conducting a due diligence checks on the company’s liabilities and contracts.

Our client assured us that there was absolutely no need to waste money on due diligence checks as the target company had already made frank disclosure of debts amounting to $800k, which both parties had mutually agreed to take into account in the purchase price. In divulging such information, he felt that the owner had proven himself a man of integrity – or else why disclose the enormity of its liabilities?

We suggested to my client that the due diligence exercise would be part of our services when representing him in the purchase; in any case, it would not delay the sale or cost much money. The client reluctantly agreed (and only because he wanted to prove that I was being paranoid!)

Our due diligence showed that the target company owed creditors total debts of over $2.3 million! Additionally, foreign workers employed by a “sister” company were being deployed in their workshops and being paid an hourly wage, putting the company in breach of strict MOM regulations concerning the employment of foreign workers. So our “man of integrity” turned out to be a “man of straw” after all.

Our client was very grateful (and humbled) that we had saved him from a “rotten” deal.