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

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Comments & Replies: 5     Views: 3186     Posted By: Peter Siegel MBA  Peter Siegel MBA: BizBen Founder, ProBuy/ProSell Program Director



Topics: Legal Issues, Selling A Business     Tags: legal issues, selling a business



When selling a 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 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 donít 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.


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.


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.

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.


  Helpful Resources To Assist In Selling And Buying California Businesses
Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Ranvir S. Sandhu, Esq. - Legal Services For Buyers And Sellers

I've worked at top Bay Area law firms and have extensive experience with business entity formation, mergers, dissolutions, conversions, employment matters, including experience in reviewing and negotiating transactional documents such as leases and purchase agreements.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.


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