23 September 2024: Selling a Business
The Truth Matters
“If you’re considering selling your business, you must ensure that you provide true and accurate information.”
Believe it or not, that’s the first sentence of an article I read recently about how the owner of a business in Australia would be committing a crime if, while trying to sell their business, they acted in a “misleading and deceptive” manner.
WHAT WE’RE LOOKING FOR: Distribution and Transportation: EBITDA >$7M. Location: Continental U.S.
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The fact that such an article had to be written – indeed, that such a law had to be written – says nothing good about society.
I don’t mean to pick on Australia – that was simply the jurisdiction of the law in question – as I’m certain there are similar laws in many other countries. But what does it tell us?
Business Owners
Well, the first thing it tells me is that a business owner fudging – or just outright lying – about the condition or future potential of their business is in the throes of a FSBO – For Sale By Owner; the act of trying to sell their business themself. (Last week’s post described several notable reasons why you shouldn’t.)
I state that because most professional business brokers are both knowledgeable about the businesses they are engaged to sell and ethical in their professional practice. Therefore, the data that is provided to a buyer about a business that is represented by a professional business broker is most likely to be accurate. But, still, is it complete?
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When selling a business, it’s not unheard of for the owner to omit material negative facts about their business. Such facts might be financial, legal, environmental or even personal.
Buyers often ask us, “Why is the owner selling?”
We generally don’t answer that question – unless, of course, our client specifically authorizes us to – because the reason might inadvertently give the buyer a sense of the seller’s motivation and, thus, significant leverage.
For example, if the owner is selling because they or their spouse is gravely ill and the buyer discovers this fact, the buyer could believe that they have a bit more leverage and negotiate accordingly, a condition that could put our client at a disadvantage.
But we have to recognize that, when selling a business, the owner wants to get as much money as possible and has an incentive to hide or neglect to mention something that could be deleterious to their business.
Let’s use the example of a retailer with a great location at one of the two corners of a “T” intersection and there’s a 100 acre property across the roadway at the top of the T. If the business owner knows that a 400-unit apartment project is about to be approved for that acreage, the owner will be certain to tell the broker – and everyone else, for that matter. But if, instead, the owner knows that a landfill is likely to be approved, he or she will certainly have a motive to keep that news from the broker – and certainly from any buyer if their selling effort is a FSBO.
“Mushy” Language
The Australian law addresses acts of both omission and commission – and is interpreted to include, among other instances:
- A failure to speak where the information withheld may have affected the truth of something you have communicated;
- Silence where the circumstance is one where you would ordinarily be expected to disclose particular facts;
- Promises, where there is no intention of keeping the promise;
- A prediction as to the future, or an inaccurate opinion, where there are no reasonable grounds for making it.
True, some of this is pretty mushy. Terms like “ordinarily be expected” and “reasonable grounds” are remarkably difficult to define. And even though the intent may be clear, such mushy language is one of the keys drivers of legal fees.
By this point, you can probably understand that the person most at risk is situations like this is the buyer.
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Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on the cost of any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
We’re surprised at the number of buyers who come to us without representation. It’s our guess that this results from one of two reasons – and sometimes, both.
- Even though no more than a tiny percentage of buyers has any experience in buying businesses, many buyers are overconfident in their ability to handle this themselves.
- Many buyers don’t want to pay for professional assistance in the acquisition, a false savings in the extreme insofar as pulling the trigger on a business that is about to suffer the impact of an event that professional representation could have either unearthed or mitigated against in the terms of the deal could be financial catastrophic.
Which brings us to the second answer to the question I posed at the beginning of this journalistic tour de force; to wit, it tells us how important it is for buyers to be properly represented.
Buyers need to know everything about the business they’re considering acquiring. But they also need to know that this objective is neigh near impossible. Therefore, they need the documentation developed for the deal to protect them. Both “needs” require experienced talent in the form, first, of a professional business broker or M&A specialist and second, an experienced transaction attorney.
The Bottom Line
Selling a business is usually the most significant financial event in the life of both seller and buyer. Unethical behavior on the part of the seller is, unfortunately, not unheard of (as described in this two-part post – Part 1 and Part 2 – of a transaction we were involved in).
Professional business brokers represent buyers as well as sellers. The good ones are knowledgeable about business in general and their particular geographic area in particular. They can’t know everything, of course, but they generally have their ear to the ground on what is happening in their community or the industry they specialize in.
Another indispensable talent is a transaction attorney; not your divorce lawyer or the counselor you call when you kid gets caught doing 80 in a 45 zone just before remodeling the front end of the Lexus. Find someone who’s been structuring deals for a few years. Your business broker can probably help with this.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
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If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at
jo*@Wo*******************.com