If you are trying to sell your business and you have hired a business broker – please do yourself a favor and make candid and full disclosure to your broker about details of the business. Sometimes clients fail to disclose something material about their business, apparently assuming that if they don’t disclose it then maybe nobody will ask about it, figure it out, or at least when it is disclosed it can be explained away. Generally this is a really bad strategy for the following reasons:
- No business is perfect, and no reasonable buyer expects a business to be perfect. If you have made inaccurate representations about the business to your broker then your broker may not position your business correctly. For example, perhaps your business has slow collection of receivables will receipt of payment an average of 75 days from completion of work. Maybe the reason the collection for receivables is so slow is that your spouse is your book-keeper and he/she doesn’t stay on top of things and fails to send out invoices, on average, for 40 days and then fails to follow-up on slow paying customers. If you instead tell your broker that “we do have trouble collecting payment from customers – they are all slow pay” your broker may position the business far differently. If I were representing the business and I knew the real story I would inform prospective buyers that the person doing the accounting probably was not the best match for the job since they were chronically delinquent in sending out invoices for 40 days and failed to follow up with late payments, and that better management should enable the business to have average receivable collections less than 30 days. Using this example, a prospective buyer may be leery to move forward if he thinks that the customers are slow paying despite normal collection procedures, but he may be very interested in moving forward if he thinks that the reason for the slow pays was a fixable personnel problem.
- During due diligence a buyer will likely discover the truth anyway. A business is a significant purchase. Most buyers will conduct very rigorous due diligence before they will buy a business. If a buyer conducts their due diligence correctly, they will become intimately familiar with nearly every aspect of your business. If the detail you are obfuscating is one that may potentially cause a buyer not to move forward, then wouldn’t it be better for them to know this upfront and not waste your time if it is a deal killer? Often a Letter of Intent will contain an exclusivity condition that precludes the continuation of active marketing of the business during due diligence – so if a buyer backs out after due diligence because of a detail that should have been disclosed up front you may have delayed your business marketing unnecessarily.
- Business sales are about trust. We’ve all watched movies and TV shows about adversarial corporate raiders who are buying businesses where negotiations involve a lot of fist pounding, demands, and aggressive back-and-forth. The reality for most small business sales is usually far different. Generally for most small business sales that make it to the finish line, there is a positive, open, and trusting relationship that needs to be developed between the buyer and seller and ideally between the buyer, seller, and broker. If there is inaccurate information presented it can destroy that trust causing the buyer to believe that either the broker is dishonest, the seller is dishonest, or both! They will then scrutinize every detail of the business and will be far less likely to give you the benefit of the doubt on issues that make them uncomfortable. In fact, without feeling very confident about the integrity of the business, the buyer may not want to move forward at all – even if the detail that you failed to disclose correctly is a seemingly irrelevant detail. Trust is everything.
A better strategy for dealing with issues that you think may impact marketability of your business would be to candidly discuss the issues with your business broker. Your broker can then discuss positioning and communication strategies, or give you suggestions on things you could do to fix the problem prior to actively marketing the business. Sometimes deferring a sale for 3 months to a couple of years to fix problems can dramatically impact marketability and value, making the delay very financially worthwhile.
Codiligent Business Brokers – Portland, Oregon based business brokers representing sellers of businesses with $500k – $20 million in annual revenue. To schedule a free consultation to discuss the possible sale of your business you may contact Eric Williams at 503-535-8817 or E@codiligent.com
