What should a buyer do upon discovering incorrect valuation assumptions during due diligence?

When a buyer uncovers incorrect valuation assumptions during the due diligence process, notifying the seller and proposing a new lower price is a prudent course of action. This approach aligns with the principles of fairness and transparency in the negotiation process. It allows the buyer to address the discrepancies discovered that impact the overall valuation of the business.

Engaging in dialogue with the seller about the incorrect assumptions provides an opportunity for both parties to reassess the valuation based on accurate data. Proposing a revised purchase price not only reflects the buyer's due diligence efforts but also ensures that the transaction remains equitable, satisfying both the buyer’s interests and the seller’s expectations. Open communication can also foster goodwill, making it more likely for negotiations to continue constructively.

In contrast, completely withdrawing from the acquisition might overlook the potential value or synergies that could be realized, while proceeding with the original offer without adjustments would not be responsible in light of the new information. Escalating the matter to legal advisory could be necessary in a more serious context, such as if there were potential legal implications, but it is typically not the first step to take in addressing valuation discrepancies. Thus, proposing a new lower price facilitates a more constructive negotiation process and aligns with the best practices in M&A transactions.