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Mom Was Right.  Honesty Really Is the Best Policy

Not a Record to Brag About

Forbes has reported that “approximately half of all deals fall apart during the formal due diligence stage, and one of the most common reasons this happens is due to buyers uncovering issues which the sellers didn’t’ disclose earlier.”

Transparency Can Be Hard For Business Owners

Most established business owners have better than average marketing and advertising skills if they have been successful.  As a result, they know how to market the shiny advantages of their business and they also know how to hide their challenges.  No one likes to show their warts, and everyone wants to negotiate the maximum price.  The normal thought process that showing the warts is not synonymous with best price urges sellers to “hold back” on material facts that are negative to the business.  Counter-intuitively however, this mode of operation is potentially the most costly.

The Why’s and How’s of Disclosing:

  1. Remember that to get the best price, the business sale actually has to close, and the best chance for closing is to build trust with the buyer early and throughout the entire process, not by hiding the rust spots.
  2. Time kills deals. If you try to hold back information on a business challenge, assume the buyer will find out during due diligence, or worse at closing. They almost always will.  There is nothing worse than going through the effort, emotion, and time to get a purchase agreement signed,   go through all the prep efforts for the transfer for both parties, and then have the deal implode.  You have just lost precious weeks or months that you will never get back. The emotion of starting over can be demoralizing.  In certain cases, this has made the business un-marketable due to changes in economy / financing climate, confidentiality leaks, or declining business performance during the previous deal attempt.  Lawsuits frequently occur to recoup transaction costs.  Try selling your business with pending lawsuits.  It can get real ugly, real fast.
  3. Tell your broker/advisor everything. We’re on the same side.  While brokers are obligated ethically to disclose all material facts to buyers, telling the broker about the business challenges pre-listing helps us to prepare the business for market.  Go through everything about the business that keeps you up at night with your advisor.
  4. Bring up the bad points early.  If you bring up the challenges before the buyer finds them, (and they will find them during due diligence,) then you can present them in the least negative light, and prepare the buyer for it.  Also, the seller bringing up the challenges early will actually help the negotiations later.  It takes the wind of the buyers “yea but….” sails, and creates an asking price anchor, including the bad points, in buyers’ minds.
  5. Gather all the information early in the process, so you have it ready for due diligence. Take much of the stress out of your life by not being under the gun, collecting data.  Your Advisor can help with the documentation and business prep task lists.  It will take extra effort on top of keeping your normal business operations going, but it is much less stressful to collect the information when you have weeks to get it rather than hours during due diligence. Many of the negatives can be explained, minimized, or prevented with proper documentation to explain the “Why” of the negatives and the ”How” it can be avoided or minimized for the buyer.
  6. Make certain all your team decision makers are on the same page for full disclosure. Business partners or spouses’ ad-lib attempts and body language to minimize a negative that you have just mentioned in a buyer meeting won’t help negotiations if you’re not on the same page.

There is no perfect business.  Every business has challenges and you’re business will be a shining star in buyers' eyes, if you disclose them early, and have a plan to help the buyers mitigate those challenges. Stack the cards in your favor by fully disclosing the warts.  Full disclosure is the best chance of actually closing the sale with the best price.

Josh Klassen
Josh Klassen
As a Business Advisor for Transworld Business Advisors of Minnesota, I am directly involved with helping people looking to buy or sell a business. My experience has included being a commodity trader and investor for a private company based in Oregon, and working for a full service brokerage and investment firm in Minnesota. I graduated with a degree in business from a private college in Minnesota. While running my own business in college, I found my passion for business entrepreneurship. This passion has grown into a desire to help business owners who are looking to sell and move on to the next phase of life, as well as helping entrepreneurs and prospective buyers find what suits them. In my free time, I enjoy being in the outdoors, camping, hiking, and playing sports.

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