Forbes reported recently that nearly half of all business sales deals fall apart during the due diligence phase. One of the most common reasons is the buyer uncovering issues that the sellers neglected to disclose. Ouch. When it comes to selling a business, honesty really is the best policy.
It’s Not Easy to Be Transparent
Business owners are used to advertising and marketing their businesses. They know how to highlight the positives and play down the negatives. It’s risky to be completely open and show the business as it really is, warts and all. Unfortunately this will only lead to more problems in the future, and is likely to be quite costly in the end.
The “Why” and “How” of Disclosure When Selling a Business
You want your business to sell, and the sale has to actually close. The best chance for closing is by building trust throughout the process, not hiding problems. Here are some specifics of why disclosure is so important when selling a business.
- Everything will come out eventually. If you withhold information about a business challenge, you can assume the buyer will find out. And if they find out during due diligence, it’s painful and could lead to them backing out. Even worse, if they find out during closing, they are likely to bail out. That leaves you with months of effort, emotion, negotiation, and time and nothing to show for it. It can be difficult to restart the process.
- Don’t hold anything back from your broker or advisor. You’re on the same team as your business broker – don’t make their jobs more difficult. When they know about business challenges up front, an advisor may be able help prepare the business for market and address some of those challenges proactively. Tell your broker whatever keeps you up at night worrying about your business.
- Take your medicine as soon as possible. By bringing up the bad points of your business before the buyer finds them, you can prepare them for it and present the information in the best possible light. You can proactively frame the discussion rather than the buyer feeling ambushed later on in the process.
- Gather all the information you need and be ready for due diligence. A good M&A advisor will help you with documentation and checklists for preparation. You’ll also be keeping your business going, so it’s extra work, but it’s better to do it sooner than later. When you’re under the gun of a due diligence deadline, you’ll wish you had started earlier.
- Get everyone on the same page. Make sure all the key players on your team have the same story and approach. Don’t let anyone ad-lib or go off script. Your business broker will help you craft a way of communicating your challenges, and you should stick to the plan.
It’s always good to remember there is no such thing as a perfect business. The buyer doesn’t really expect perfection, but they do expect honesty. Disclose challenges early and fully, and you’ll win the trust of your buyer. That will give you the best possible chance to close the sale with the best price.
To navigate the process of selling a business, enlist the assistance of a qualified, experienced business broker like CGK Business Sales. Contact our Baltimore, MD office – or any of our offices across the US – and you’ll find the help you need to close the deal and close it right. There’s never any obligation when you talk to us, and all conversations are confidential. Best of all, we get paid when the deal is closed. Sound good? Let’s talk.