How undocumented related-party transactions can shift from an internal detail to a sufficient reason for an entire investment deal to collapse.

The Story

We conducted a brief review of a company preparing for an investment round. The outcome surprised the owner.

The company was performing very well, its numbers were reasonable, and its team was cohesive. But it had a serious gap: financial dealings with related parties, with no clear policies, no oversight, and no documentation to protect anyone.

Any serious investor will uncover this in the first week of due diligence review—at which point the deal stalls or the valuation is reduced.

What Are Related-Party Transactions?

Related-party transactions are any financial dealings between the company and a party with a direct connection to it: an owner, a board member, an executive, or another company owned by any of them. Loans between the company and its owner, supply contracts with a sister company, leasing a property owned by a shareholder, or salaries paid to family members that do not match their actual roles are all everyday examples of this type of transaction.

These transactions are not inherently improper, and they are common in most private and family-owned businesses. The real issue is not their existence, but the absence of three elements: a clear policy defining when they are entered into and who approves them, fair pricing on market terms rather than relationship terms, and sufficient documentation proving that both parties acted transparently.

Why This Gap Is Especially Serious at the Investment Stage

In day-to-day operations, these transactions may pass without causing an obvious problem, because the parties know and trust one another. But when the company enters a financing or investment stage, the standard changes entirely: the investor does not know the parties and trusts only what is documented.

• Due diligence review specifically examines this type of transaction systematically, because it is the most common channel through which value leaks out of the company.
• A lack of documentation is interpreted by the investor as a lack of oversight—not as good faith—regardless of how clean the dealings may be in practice.
• Every unclear transaction raises a question: Is this contract priced fairly, or is it a hidden privilege for one party at the expense of the other shareholders?
• And if these questions recur without documented answers, the investor loses confidence in the numbers as a whole—not just in this line item.

How the Deal Typically Ends in This Case

An investor rarely rejects the deal outright because of this gap. More commonly, one of three paths occurs: a direct valuation haircut reflecting an unquantified risk, stricter protective terms that later constrain management decisions, or postponing the deal entirely until these transactions are restructured—a delay that consumes time and momentum that may not return.

How We Addressed the Case

We worked with the owner on three parallel tracks:

A full diagnosis of the shortcomings: a comprehensive inventory of all existing transactions between the company and any related party, regardless of size or age, because the investor will ask about the small ones just as they ask about the large ones.

Building a clear, workable governance framework: not a document kept in a drawer, but a practical mechanism that defines who approves any new related-party transaction, and at what financial threshold the decision escalates to the board of directors or the general assembly.

Related-party transaction policies aligned with regulatory standards: repricing existing transactions on market terms, and formally documenting every contract or arrangement, so that any external auditor or investor can verify its fairness without referring back to anyone inside the company.

Result: increased investor confidence and a fair valuation.

Conclusion

Governance is not a luxury; it is what separates a deal that closes from a deal that collapses. Most companies that reach this point do not discover their gaps on their own—an external party discovers them as quickly as possible, when fixing them is harder and more costly.

The question worth asking early—not in the first week of due diligence review—is: Is your company ready for review at its next stage?