Every business owner wants to portray the best aspects of their business to a prospective buyer because they want to get the absolute highest price possible. There is nothing wrong with this and in fact, your broker is doing his/her best to show your business in the most favorable light as well.
However, one of the most fatal errors a seller can make is to answer a direct question from a prospective buyer with a vague or nebulous answer, or even worse, to blatantly lie to the buyer. Savvy buyers realize that when the seller’s responses are vague, s/he is hiding something and lies are almost always revealed during due diligence.
After an offer has been negotiated between buyer and seller and an agreement has finally been reached, the due diligence begins. Most buyers are going to dig a little deeper into all of their initial questions. They are looking for verification that the answers provided were accurate. If they discover the seller was less than truthful about the business during the initial negotiations, most buyers will terminate the transaction and walk away.
I have seen buyers walk away due to some of the following:
1) The seller was not licensed properly to conduct the business he was conducting. Furthermore, a license could not even be obtained for the business location in which the business was operating because it violated city ordinances.
2) The seller represented he had been working with certain clients for years when those clients had literally been obtained only a month or two earlier.
3) A seller stated to the buyer that he had a wide diversified client base when in fact one client represented over 60% of his sales.
When a buyer walks away due to a seller's misrepresentation, the business, if it is saleable, generally sees a price reduction. There may have been lost opportunities with other prospective buyers because they didn’t want to make an offer on a business that was already under contract. And, in the end, if and when the business sells, the seller generally receives less than s/he would have if s/he had just been honest with the buyer(s) and broker(s) in the first place.
As a business owner, if there is anything about your business that you believe will negatively impact the sale or sales price, discuss it with your broker. Together you can determine how to disclose it in a manner that will be advantageous instead of trying to hide it, just to have it come back and bite you. Every negative can be turned into a positive if you just take the time to be creative and think it through.
When it comes to communicating with buyers, honesty truly is the best policy. Anything less will most likely be fatal to your transaction.
About The Author: Tawnya Gilreath is the managing broker of LA Business Pros in Los Angeles County. Tawnya can be reached at 818-781-0082 for assistance in buying or selling a Los Angeles County area business.
Posted on May 9, 2011 | 
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