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What Do I Need To Disclose To A Prospective Buyer Of My Business?



Posted By: Peter Siegel MBA: BizBen Founder, Lead Advisor.   When selling a small business you always run the risk of a lawsuit. They aren't as common as one may think in this litigious world in which we live in, but whenever there is money exchanging hands & attorneys involved the stage is set for a lawsuit. Various ProIntermediaries share their viewpoints.

When you always run the risk of a lawsuit. They aren't as common as one may think in this litigious world in which we live in, but whenever there is money exchanging hands and attorneys involved the stage is set for a lawsuit.

In an earlier topic we talked about being careful about what you say to a prospective buyer to protect yourself from a lawsuit for misrepresentation. In this post my advice is to be careful about what is not said. The other side of misrepresentation that can land a seller in court is the claim that the buyer was not told about a factor that negatively impacts the business. The buyer might argue that the seller knew about, for example, the impending loss of a major customer, or plans for a larger company to begin competing with the business being sold. And failed to disclose the information. The bottom line regarding misrepresentation and lawsuits is to always tell the truth.

Disclose what needs to be disclosed and don't over sell your business or make false promises or guarantees. Think about yourself as the buyer and tell them what you would want to know yourself if you were in their position.

Contributor: Business Appraisals, Valuations Advisor
First off, the seller must be completely honest with his broker. If there faults the broker can soften their impact by bringing them up early in the selling process.

During due diligence all records and all areas of the business should be open to the buyer. The seller should be eager to provide any information the buyer wants. There should not be a time limit on how long the seller can review the business records. If the buyer wants to go through every file be patient and help him.

It is always wise to have the buyer sign a statement that he was satisfied with the due diligence.

First off, the seller must be completely honest with his broker. If there faults the broker can soften their impact by bringing them up early in the selling process.

During due diligence all records and all areas of the business should be open to the buyer. The seller should be eager to provide any information the buyer wants. There should not be a time limit on how long the seller can review the business records. If the buyer wants to go through every file be patient and help him.

It is always wise to have the buyer sign a statement that he was satisfied with the due diligence.
The applicable legal terms are: "reasonable," "relevant," and "material."

The seller must make a reasonable assessment of any and all factors that are material (of significant value or risk) and that are relevant (that relate to the business after the closing) to the transaction, EVEN IF the buyer has not specifically asked the "right question." For example, knowing that the street in front of the store will be closed for repairs for three months shortly after the closing and not revealing that information to the buyer could be both relevant and material. For another example, knowing that the city may be planning on requiring shop owners to display street address numbers of a certain size at some time after the closing may be "relevant", but it is hardly "material." And, for yet another example, if the seller has terminal cancer and there is no significant way this will adversely affect the business after the closing, that health issue is neither relevant nor material and does not need to be disclosed.

In short, this is a "CS" issue -- common sense. If the seller has any doubt or question about material and/or relevant disclosures, this would be a very important conversation to have with an attorney, before entering into contract.

And, then there is the question of "When to disclose?"-- It should be sooner rather than later. Definitely any disclosure should be made during due diligence if known, or as soon as the seller does know if discovered after due diligence. The longer the delay in advising the buyer, the greater the potential damages to the buyer, and the greater the potential liability to the seller.

The applicable legal terms are: "reasonable," "relevant," and "material."

The seller must make a reasonable assessment of any and all factors that are material (of significant value or risk) and that are relevant (that relate to the business after the closing) to the transaction, EVEN IF the buyer has not specifically asked the "right question." For example, knowing that the street in front of the store will be closed for repairs for three months shortly after the closing and not revealing that information to the buyer could be both relevant and material. For another example, knowing that the city may be planning on requiring shop owners to display street address numbers of a certain size at some time after the closing may be "relevant", but it is hardly "material." And, for yet another example, if the seller has terminal cancer and there is no significant way this will adversely affect the business after the closing, that health issue is neither relevant nor material and does not need to be disclosed.

In short, this is a "CS" issue -- common sense. If the seller has any doubt or question about material and/or relevant disclosures, this would be a very important conversation to have with an attorney, before entering into contract.

And, then there is the question of "When to disclose?"-- It should be sooner rather than later. Definitely any disclosure should be made during due diligence if known, or as soon as the seller does know if discovered after due diligence. The longer the delay in advising the buyer, the greater the potential damages to the buyer, and the greater the potential liability to the seller.
I agree with Timothy, it is critical to disclose everything about the business to buyer. However, how it is disclosed is as important as what is disclosed. When I take new listings, I really stress the importance of the seller disclosing every possible negative about the business to me upfront. The worst thing that can happen is if the buyer finds something negative during due diligence that wasn't disclosed prior to either the broker or the buyer. It is very hard to regain the trust in the deal if undisclosed information looks like it was intentionally hidden. On a positive note, I have sold many businesses that had issues and it wasn't a problem because of the way it was presented upfront. You are never wrong when you do the right thing.

I agree with Timothy, it is critical to disclose everything about the business to buyer. However, how it is disclosed is as important as what is disclosed. When I take new listings, I really stress the importance of the seller disclosing every possible negative about the business to me upfront. The worst thing that can happen is if the buyer finds something negative during due diligence that wasn't disclosed prior to either the broker or the buyer. It is very hard to regain the trust in the deal if undisclosed information looks like it was intentionally hidden. On a positive note, I have sold many businesses that had issues and it wasn't a problem because of the way it was presented upfront. You are never wrong when you do the right thing.

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