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MEDIA - PRESS COVERAGE |
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Be Upfront About Problems
SOURCE: Green Bay Press Gazette, May 11, 2008
Scott Bushkie
From potential lawsuits to environmental concerns and malfunctioning equipment, there are many challenges a business owner could be tempted to hide during a sale. Failure to disclose a problem, however, is the quickest way to blow up a deal and waste a lot of money in the process.
Here’s a hypothetical scenario: Mr. Seller owns a manufacturing company with solid revenues and a diverse customer base. One of his customers is planning to shift production to China, taking about seven percent of revenues when it goes.
Mr. Seller chooses not to disclose this to his advisors or to the buyer. Instead, the buyer finds out during due diligence, learning that not only is the customer leaving, but the seller knew it all along.
At this point our seller has lost all credibility. The buyer wonders what else he’s been hiding and immediately walks away.
Don’t hide faults. We’ve sold more than 280 businesses at Cornerstone, and I have yet to see a perfect company. Every business has flaws.
Be honest up front. You don’t have to paint a worst case scenario, just accurately depict potential issues.
Weaknesses are often opportunities. In many cases, those problems mean valuable growth potential and an experienced advisor may target buyers who can overcome your weaknesses.
Perhaps you have a bad safety record and insurance costs are high. A buyer might remedy that with training and reverse those expenses within a few years. Maybe a key piece of equipment is unreliable. If a buyer has the capital to fix it, production could increase.
You can’t hide problems. It’s extremely difficult to hide flaws these days. Buyers are getting more sophisticated and they are bringing a larger team of advisors to the table. If the buyer doesn’t find it, the attorney might, or the accountant, or the lender, or the title company, or the environmental consultant . . . you get the idea.
Little problems upfront stay little. In our hypothetical scenario, a buyer might have brushed aside a seven percent revenue loss had it been disclosed early on.
At the beginning of the sale process, buyers are optimistic and objective. They are excited about the potential and quick to see opportunities.
As the deal draws closer to close and the reality of such a large financial commitment looms large, buyers get wary. Combine an emotional buyer with a less-than-upfront seller, and small weaknesses quickly become deal breakers.
I like to say it’s more about intuition than logic once you get to the closing table. That’s why it’s so important to establish trust early and maintain it to the end.
Be honest with your advisor. He or she will evaluate any problems and help position them appropriately. It sets the right tone for a sale and sets you up for success.
Buyers know that no company is perfect. If you’re honest about the flaws, they’ll have greater confidence that everything else you say is true. Shake their faith, and they’ll walk away.
Scott Bushkie is President of Cornerstone Business Services, a lower-middle-market M&A firm with offices throughout the upper Midwest. Reach him by telephone at (920) 436-9890 or by e-mail at sbushkie@cornerstone-business.com.
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