Being Earnest - Transparency and Honesty in Deals
Why being honest about the limitations of your business will counterintuitively make it more attractive to the right buyer.
They say that an agreement is a “meeting of the minds.” In the same vein, a deal that closed successfully is a meeting between “expectations and reality.” When putting your business for sale on the market, you can, of course, exaggerate its value and downplay its problems. That will likely attract more attention than it would have otherwise from potential buyers. But these potential buyers will all disappear once they realize they can’t trust the statements you make. When looking for a buyer, you’d rather have fewer interested buyers that actually want to buy, than a lot of interested buyers who don’t end up buying. When sellers and buyers first interact, there is naturally a lot of hesitation and mistrust, which can either be dispelled by transparency, or solidified by the confirmation that some information is too good to be true. Remember, it’s actually pretty hard to keep a secret during the business sale process; “surprises” will result in embarrassment and doubt about other aspects of the business which may be completely fine.
(FYI: this is an excerpt from my 15-page e-guide, “Seven Ways to Better Deals”, which you can get for FREE when subscribing to my Weekly Newsletter.)
Buying a business or asset involves a lot of risk for the buyer. To the extent you, as the seller, can reduce this risk by being transparent, honest, and responsive about the strengths and weaknesses of what it is that you’re selling, you will be in a great position to actually ask for more money since you’ll be saving the right buyer time and money during due diligence, and, most importantly, you would be setting the buyer up for success since the buyer would be able to plan accordingly and avoid “surprises.” If you give the buyer any reasons to doubt you, the buyer will see a transaction with you as risky; to mitigate this (perhaps imagined) risk, the buyer may likely want to reduce the purchase price (i.e., “re-trading”) or structure an “earn-out” where you are not paid the full amount at closing, but over the course of several months, while the buyer sets into your “shoes” as a business or asset owner, with the right to offset any “unreported” issues with the purchase price balance.
Similarly, a buyer may want to have a longer than usual due diligence stage, have the ability to interview your employees and key customers, and require you to represent and warrant a broader array of issues in the purchase agreement (which, if false or incorrect, will be a breach of contract). On the flip side, if a buyer doesn’t experience any different between what’s promised and what’s real, that buyer will reward you with more favorable contract terms, swifter due diligence stage and a smooth closing.
Your reputation as an honest businessperson is at stake. The buyers are paying attention. The lawyers are paying attention. The brokers are paying attention. They may not say anything, but people form judgments quite fast and it’s pretty much impossible to undo them. The business world is smaller than you think, and word spreads fast. Whenever starting a relationship with a buyer, act like you’d like them to be repeat customers: be grateful for their interest, offer them something you know they’ll want, and never forget that they don’t have to buy what you’re selling.
