Last month we discussed the concept of “due diligence” in connection with its primary usage – the buying and selling of a business. I stated that the term was relevant to important contract negotiations and in this article I will explore that aspect more deeply.
The notion of due diligence is related to the concept of “duty to disclose.” If you are in a situation in which there is no duty on one party to disclose information to the other party, due diligence then becomes critical. In reality there are few circumstances in which an affirmative duty to make disclosure exists, so each side must, in effect, fend for itself in discovering important information that affects the decision-making process.
For example, in considering a joint marketing venture with a supplier or a servicing relationship with another travel agency, neither party has any obligation to tell the other “bad news” that might make the negotiation harder for the disclosing party or even end the negotiation without a deal. In business negotiations it is usually “every man for himself.”
This means that, in addition to securing a confidentiality agreement regarding disclosures during the negotiations, you have the extra burden of asking for any information about the other party’s business that is important for you to know while you are negotiating and after a deal is made. If you do not ask, you bear the risks, just as in the acquisition/merger situations I discussed in Part I.
There are multiple ways to approach this problem, but if the deal is truly significant to your business, it is really important to get the advice of an attorney and perhaps an accountant reagrding what to ask for and how to evaluate what you get. Sometimes the other party will act offended that you would request a business history and operational details – putting on a “What, you don’t trust me?” demeanor.
The answer is no, you don’t. There is no reason for blind trust, because you understand that each side will negotiate in its own best interest, which may not coincide with your interest. This is not personal; it is just good business practice. If resistance continues, it is probably time to seek another relationship. Having a professional who is less involved emotionally in the deal is good insurance against being preyed upon by a good actor. You can always blame it on the lawyer.
I well understand that attorney and accountant advice costs money, but entering a high-risk deal that fails can cost you a lot more, in lost revenue, liability and lost client confidence.
There is another side to this coin, however. You cannot reasonably expect another travel agency – or any other person with whom you are negotiating – to disclose every aspect of its operations and finances. You always want enough information to be confident that the other party can perform the duties imposed on it by the agreement, and that it can and will assume responsibility for failures to perform. Reputation plays a role here, though a limited one. Recommendations from recognized agencies with whom similar arrangements have been made are more compelling. Only ask for business data that can tell you something meaningful about the relationship you are seeking to enter.
The bottom line is that in all important business negotiations, there is one person responsible for the outcome for you – and it’s you! If you approach all deal-making with this in mind, you should be fine.
Note: Travel Market Report is watching developments related to the “repeal and replace” of activities of Congress regarding healthcare insurance, to determine and report on any specific impacts that may be in store for travel agencies, particularly those that now provide health insurance for employed agents. However, we are a long way from an outcome so anything said about it now may prove to be wrong when the legislation actually passes, if in fact it does pass. TMR will report when there is something firm.
Read part one here.