The two most important characteristics when selling a business
If you read the title of this blog post and thought it would be about business characteristics, I apologize - that's something for another article. No, this article deals with the personal traits of honesty and integrity.
Sometimes, when otherwise honest business owners hire a business broker or investment banker to sell their company, they become tempted to stretch the truth a bit, or to withhold information that they are concerned may decrease buyer interest. Such business owners may believe that perhaps nobody will ask about the negative information, figure it out, or that if a buyer discovers it then at that point in time it can be explained away.
This is a problematic strategy. If you are considering selling your business please do yourself a favor and provide candid and full disclosure to your broker about the business. Here's why:
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 with receipt of payment at an average of 75 days after completion of work. Maybe the reason your receivables collection 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. In this example, a good business broker who knows the truth 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, and that better management should enable the business to have average receivable collections of 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 it is due to a fixable personnel problem.
Due diligence will likely reveal the truth. For such a significant purchase, business buyers will conduct rigorous due diligence with the assistance of experts, and will examine nearly every aspect of your business. If the detail you are obfuscating might cause a buyer not to move forward, wouldn’t it be better not to waste your time with that buyer? Usually a Letter of Intent will contain an exclusivity clause that precludes the continuation of active marketing of the business during due diligence – so if a deal is terminated after due diligence because of a failure to disclose information accurately, you may have unnecessarily delayed your business sale.
Business sales are about trust. We’ve all watched sensationalized movies and TV shows about corporate raiders buying businesses where negotiations involve a lot of fist pounding, demands, and aggressive back-and-forth. The reality for most small business sales is far different: a positive, open, and trusting relationship needs to be developed between the buyer and seller, and, ideally, also with the broker. If there is inaccurate information presented it can destroy that trust, causing the buyer to believe that 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 questionable issues. 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 minor issue. Trust is everything.
There's the risk of a misrepresentation lawsuit. One of the most common types of litigation associated with business sales is a misrepresentation suit, where a buyer claims they relied on incomplete or inaccurate information when they acquired the business, and had they known the truth they would have either paid a lower price or not acquired the business at all. Can you imagine selling a business, paying your broker and attorney, paying tax on the proceeds, spending some of it, and then lose a lawsuit where the damages include you returning the acquisition proceeds to the buyer?
A better strategy for dealing with issues that you think may adversely impact marketability of your business would be to candidly discuss the issues with your business broker. Your broker can then work on 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 financially worthwhile.