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Apparently sellers of businesses are far more gullible than buyers of businesses.

Businesses may want to be a bit more skeptical when dealing with potential suitors. That’s because a new study in the Academy of Management Journal has found that acquiring companies tend to trust less and deceive more than the businesses they buy.

The study examined the issue of trust between 12 entrepreneurial businesses and eight acquirers, and found that tensions between buyers and sellers appeared to start right at the screening phase and continue throughout the deal process.

“Sellers tend to eliminate partners they distrust, while buyers did not,” the study’s author, Melissa Graebner of the University of Texas at Austin, said. “So this creates a fundamental asymmetry in which most sellers trust their buyers, but most buyers distrust their sellers.”

Such material deception includes misleading sellers about post-integration plans like layoffs, relocation of personnel, changes in strategic direction or diminished roles for senior managers, the study finds.

These deceptive tactics tend to be very distressing to the seller after the deal is complete, as they tended to be extremely trusting, according to the study. That’s because the sellers often did not heed the advice provided by their own bankers and lawyers to protect their businesses and hold the sellers to their word.

“Unlike buyers, they believed they were dealing with trustworthy parties,” Professor Graebner said. “Due diligence and contractual safeguards simply did not seem necessary to sellers when dealing with trusted buyers.

As I was reading this my hunch was that these were small business sellers divesting themselves of companies under $10,000,000 in price. Turns out that the average transaction studied was $175 million. How does anyone build a company to that size and still remain naive?

Based on my humble experience, both sides need to exercise a healthy dose of skepticism when negotiating a transaction. Sellers of small businesses (<$20 million) are frequently tempted to exaggerate the facts about their business’s profitability. For example, it’s rare that an owner doesn’t confess to additional, yet unverifiable, income which he then expects the buyer to pay for.

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