What Should Small Business Owners Disclose to Prospective Buyers?

Presenting a small business to a prospective buyer is akin to going on a first date; first impressions are extremely important. The instinct of the business owner may be to mask any flaws, limit anecdotes to ones of happy employees, and inflate the importance of the business's impact in the market. Disclosing "baggage" flies against conventionally accepted courting practices.

While it's always a good idea to put one's best foot forward, hiding troubling issues from the prospective buyer is highly inadvisable. Just as an owner must be able to trust the buyer, so must the buyer be able to trust the owner who is selling. Any falsehoods, even lies of omission, will damage credibility and negatively affect the relationship between the two parties. The business owner should feel confident that the buyer is serious about his inquiry, financially fit to afford the transaction, and qualified to operate the business successfully. Likewise, a buyer must trust that the owner has represented the business accurately. No one wants to make a decision based on faulty information. Is the owner offering financials, growth projections, and notes of concern that are realistic and verifiable?

Full disclosure up front is the best way to earn the prospective buyer's trust. Concealing issues can lead to problems; after all, the owner and buyer may have different ideas of what is relevant. It is not the seller's job to decide what the buyer needs to know. The buyer needs to know all, and he or she can decide which information is significant to his or her interests. Hiding information (or outright lying) is to risk a smart and inquisitive buyer discovering a problem independently, or during the due diligence process. At that point, all credibility will be tainted. Once honesty is in question, deals rarely make it to closing.

The most effective sales tactic, especially when selling a business with troublesome issues, is for the owner to mention the issues before the buyer inquires about them. It is considerably more practical to address the potential risk and offer solutions right away so the seller is not overwhelmed by the perceived negative information. By being forthcoming about the worrisome aspects of the company, the owner will generate tremendous credibility in the eyes of the seller, who will trust even more in the positive aspects presented about the business. As was mentioned earlier, what is important to one party may not be important to the other. It's quite possible that the seller is more concerned about the issue than the buyer would be.

When marketing a business for sale, a small business owner should map out every aspect of the business that causes him or her distress, then create a list of possible solutions to remedy them and disclose them to the buyer in an "Issue/Resolution" format. If the problems were easy to solve, the small business owner likely would have solved them, but perhaps it was an issue of more time or money needed. It is possible that the prospective buyer already possesses exactly what is required to improve matters. A business owner who is afraid to disclose information is, in actuality, allowing fear and assumptions to jeopardize a profitable venture.

Small business owners who are straightforward about the strengths and opportunities of their businesses have substantially more success at the closing table, including selling at a better price and better terms. If a potential buyer unearths information the seller has not disclosed, everything the seller has said is brought into question, no matter how true it may be. Surprises have no place in small business sales.

If you would like assistance with selling your small business please contact George & Company, located in Worcester, MA.  We have honed our business skills over decades of appraising, selling, and financing small to middle-market companies.  It would be our pleasure to assist you in making decisions that will best benefit you and your company.