How to Sell an Imperfect Business and Disclose Negative Information

There is no perfect business – at least I’ve yet to come across one in years of selling businesses.  There is always something – and sometimes that something is pretty ugly.  If you have an "issue", how do you deal with it, and which is the best way to disclose it?

First, you have to disclose all relevant information. Don’t hide anything – lawsuits can get ugly.   I do get business owners that hide things, but they eventually come out (well, I suppose there have been some ugly secrets that stayed well buried and myself nor a buyer ever found out).  If they come out after the transaction, it tends to infuriate the buyer (as you can imagine) and twice I’ve had to become involved again to try to smooth things out.

I sold an emergency response company that consisted of many tractor trailers units of various sizes and functions.  The very first call-out for the new buyer on a major emergency one of the trucks got stopped at a highway check point for safety violations.  Unfortunately, that was the start of a very rocky relationship between the buyer and seller. 

The best time to disclose negative information is fairly early on, when the buyer is still getting excited about the business.  At that point the benefits of the business are looming large in the buyer’s mind, so when weighing the negatives the benefits have more of a chance of coming out ahead.  Sometimes the buyer just about ignores the negative information.

Later in the transaction is a bad time.  Business sales transactions can take many months to close, and both buyer and seller can get tired.  Exhausted, actually, and at times it doesn’t take much to kill a deal. 

Ignoring a problem and letting the buyer or their advisors dig it up is the absolute worst possible tactic.  It destroys buyer trust.  In fact, it destroys broker’s trust.  When I catch a business owner hiding something, a big red flag goes up in my mind.  I’m especially careful representing this owner, because I don’t know what else he may be hiding.  He may not mind a lawsuit, but I do.

I heard of a pizza salon that went nearly through due-diligence when the buyer’s accountant caught some irregularities in the financials.  The seller admitted that those occurrences where when they were robbed at gunpoint – four different times.  The buyer (a woman) lost interest.

You don't have to fix your negative, but it helps greatly to show it can be fixed.  Many times I hear business owners say things like: "Yes, I have $1 million in obsolete inventory, but it could easily be sold on ebay".  I would suggest that some of the inventory be sold on ebay, so you can show a buyer that this is indeed a valid solution.