Transparency in M&A: Hiding a Problem Usually Costs Dearly

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.” This is yet another memorable line from Warren Buffett, one that could apply to what happens in an M&A deal when the seller decides to hide a material problem from the buyer.

In M&A, every company has problems and hidden information.

The question isn't whether there's risk or impact on the negotiations. The question is when, how, and by whom the risk will be presented to the buyer.

My recommendation, after more than 20 years sitting on both sides of the table, is simple: a material problem should not show up as a surprise in due diligence.

If a matter can affect interest, price, guarantees, or the structure of the deal, it's best to address it early, with context and strategy. I'm not advocating naivety. I'm advocating negotiating intelligence. They're different things.

Honesty is also a technique

Transparency isn't just a moral virtue. In M&A, it's a negotiation tool.

When the seller reveals a risk in an organized way, they preserve credibility. It shows they know their own company, understand the impact of the problem, and are willing to negotiate seriously.

When the buyer discovers it on their own, the reading changes completely. The problem stops being just the problem. It also becomes a doubt about trust in the seller. And that's when the game turns.

Think about the buyer's logic. If they found this hidden risk, what else weren't they told? From that moment on, every piece of information in the Info Memo starts being read with suspicion. The spreadsheets become suspect. The seller's answers earn a mental asterisk.

Broken trust is expensive. It doesn't cost in rhetoric: it costs in price, in guarantees, and in closing speed.

[Read also: How to sell a company: preparation, price, and anxiety.]

The case that became a manual of what not to do

In 2011, Hewlett-Packard paid around US$ 11.1 billion for Autonomy, a British software company. A little over a year later, HP recorded a write-down of US$ 8.8 billion and attributed much of the amount to “serious accounting improprieties” that, according to the company, had been masked during the process.

The episode turned into a legal soap opera in several countries, toppled reputations, and never returned the money to HP. The point that interests me here isn't the technical merit of the accounting. It's the devastating effect of surprise. When the buyer feels they were deceived, the destruction of value goes far beyond the number of the fraud.

Closer to home, the case of Lojas Americanas in 2023 is equally instructive. When a billion-real accounting inconsistency came to light, linked in part to the treatment of reverse-factoring operations, the company's entire chain of relationships was hit at once: creditors, investors, suppliers, and partners.

The message for anyone who buys and sells companies is crystal clear: material and inconsistent information isn't just a technical risk. It's a time bomb.

There's also the opposite side, the case of someone who did it right. When Disney bought Pixar in 2006, much of the value was in the culture and the people, not just the balance sheet. Steve Jobs knew this and didn't hide it from Disney. The negotiation was conducted with candor about what could go wrong in the integration. The result became a benchmark precisely because of the transparency and the alignment of expectations.

What usually goes wrong

Some topics simply don't go well with surprise. The ones I most often see blow up too late are:

• material tax contingencies and poorly provisioned labor liabilities;
• excessive concentration of customers or suppliers;
• important verbal contracts, without formalization;
• financial information inconsistent between what is said and what can be proven;
• shareholder disputes and excessive dependence on the founder;
• the recent loss of a large customer and operational weaknesses that affect EBITDA.

Of course, not everything needs to be revealed over the first coffee. M&A also requires timing. There's a right moment for each piece of information, and that's part of the strategy. But material risks need to enter the conversation before the buyer feels they were led into a trap.

The numbers reinforce the argument. Classic studies from the Harvard Business Review point out that most mergers and acquisitions fail to deliver the promised value, and a significant part of that failure stems from problems not captured in due diligence or from discrepancies between what the seller presented and what was found after closing. Audit firms like KPMG and PwC reach similar conclusions in their recurring reports on the subject.

It's not bad luck. It's a pattern. And a pattern is prevented with method. [Read more: The blind spot of due diligence: why internal processes decide the acquisition.]

Revealing early doesn't mean losing price

Many sellers are afraid to open up about problems because they believe it lowers value. Sometimes it does. But the opposite can also be true, and it's what happens most often when the process is well run.

A well-explained risk can be priced in a negotiated way. A risk discovered late tends to turn into an aggressive discount, a larger escrow, a broader indemnity clause, an earn-out loaded with conditions or, in the worst case, plain and simple withdrawal.

Notice the asymmetry. In the first case, the seller controls the narrative and shares the risk with arguments. In the second, they lose the narrative and still pay the bill for the distrust. The difference between the two worlds often comes down to a single decision made at the very beginning, before the LOI.

The professional buyer understands that real companies have problems. They don't expect to buy a perfect company. What they won't accept, and never will, is the feeling of having been sold a pig in a poke.

That's why, in every sale process I coordinate, the honest mapping of risks comes before the Info Memo goes out. Serious M&A advisory doesn't exist to hide flaws. It exists to turn a known flaw into a negotiated clause.

How to address risk early, in practice

Addressing a problem early isn't confessing weakness in an emotional meeting. It's building a case. At Biz Invest, I usually follow a simple sequence.

First, identify and size it. What is the risk, how much is it worth in the worst case, and what is the real probability of it materializing.

Second, document it. Opinions, reports, provisions, track records. A risk that comes with evidence and a plan is worth much more than a loose risk. It's the difference between saying “we have a liability” and showing “we have a liability, this is the amount, this is the defense, and this is the provision.”

Third, position it at the right time. Neither too early, to the point of scaring before there's a bond, nor too late, to the point of looking like concealment. This is where experience comes in: knowing where, between the NDA and the SPA, each matter should come to the table.

Fourth, propose the solution along with the problem. A seller who arrives with the risk and the way out — whether a guarantee, a price adjustment, or a contractual mechanism — keeps control of the negotiation. Whoever only delivers the problem also hands over their bargaining power.

This method doesn't eliminate the discomfort. I'd be dishonest if I promised that. But it swaps the expensive discomfort at the end for the cheap discomfort at the beginning. In M&A, that trade almost always pays off.

The invisible cost of omission

There's a cost that doesn't appear in the spreadsheet: time. When a material risk appears by surprise in due diligence, the process stalls. The buyer pulls back to reassess. The lawyers reopen the contract. The schedule slips by weeks, sometimes months.

In M&A, time is the enemy of closing. The longer the process, the greater the chance that the market shifts, that the buyer cools off, that a competitor appears, or that the seller's own business suffers a shock. The omission, which seemed like a saving, becomes the most expensive path between two points.

A good deal can die not because of the size of the problem, but because of the moment it appears. The same risk, revealed three months earlier, would have cost a price adjustment. Revealed in the home stretch, it can cost the entire deal.

Transparency is the best strategy for anyone who wants to close

In M&A, being honest isn't enough. You also need to appear honest, document the risks well, and conduct the negotiation in a way that's consistent with that stance from start to finish.

At Biz Invest, we prefer to confront the hard topics early. It isn't always comfortable. But it's almost always cheaper than explaining later why a material problem was kept hidden under the rug.

Transparency doesn't weaken a good negotiation. Often, it's exactly what saves it. After all, the buyer may well buy your company. But before that, they buy your trust.