When selling your business, how honest should you be about the risks and challenges it faces? Risk transparency is a common dilemma in business sales. In this article, we answer the question: is it best to reveal your business skeletons upfront, or keep them to yourself?
Risk events and their impact
When brokering business sales (with our Business Partnership had on), it’s our job to get intimate with the business we’re working with. We review accounts, customer, supplier and employee records. We check that policies and procedures are in order, analyse revenue streams, identify key staff, always thinking like a buyer to uncover the true value of the business. To enable us to do our job fully, it’s important the buyer is honest with us at this and every stage of the exit process.
In some business sales, there will be circumstances where sensitive and confidential information cannot be revealed to a buyer. For example, a tender process you have signed a non-disclosure agreement to enter into. This is different from business risks.
If you know of a risk event that is likely to have a significant impact on your business in the future, it is much better to be upfront about it. Biding your time until you and your buyer have established a certain level of trust is leaving it too late. And in our experience, a buyer who finds no skeletons in the closet can be somewhat suspicious!
Why vendors hide business risks from buyers
There are many reasons why vendors want to hide business challenges from buyers. These tend to stem from a desire to protect the business you’ve built, which is understandable. Disclosing the inner workings of your business can make an owner feel quite vulnerable and uncomfortable. However, hiding vital information from a buyer is not like telling a white lie to the dentist when they ask if you’ve been flossing every day. It’s an action that could derail your sale.
Common reasons why vendors hide risks from buyers:
- Lack of trust: particularly early in the process when the buyer is an unknown quantity.
- Reduce bargaining power: gives a buyer fewer reasons to negotiate on price.
- Speed up the sale: buyers are keen to make the due diligence process go faster.
- Fear: concern about exposing risks that may cause the sale to fall through and/or impact on staff, suppliers or customers.
These genuine concerns are all things a business exit consultant can support you with. Having someone by your side to advise, guide you, and keep the sale process ticking over makes a huge difference. If you would like to know more about selling your business without the stress and have more confidence in your decision-making, you can get in touch here.
Dishonesty derails deals
Unknown discoveries are the most common reason for business sales falling through. Dishonesty during due diligence erodes trust and credibility in you as a business owner and vendor. It can quickly make a purchase untenable and potentially lead to future legal action from the buyer. Being honest and transparent about the challenges your business faces is an essential part of the process. Let’s have a look at what future risks and challenges might look like.
Examples of business risks and challenges
Risks are uncontrollable. We can predict and plan for them, but we never quite know when they are going to strike, if at all. The more certain you are that a risk will have impact, the better it is to disclose it. Here are some common risks and how to mitigate them.
Losing a key manager
Having a strong, stable management team in place adds value to a business. If you are aware that a senior manager or another key staff member will soon be leaving, you must disclose this to your buyer.
Mitigate this by making plans to prevent key staff leaving, such as awarding bonuses based on tenure, granting company shares with sale restrictions, or adding non-financial elements to contracts e.g.flexible working. If an employee still wants to leave, plan to train up their replacement for a seamless transition.
Failure to win a key contract
If you enter into a competitive tender process and fail to win, you must be upfront with your buyer – more so if your cashflow forecast is based on winning the contract. Loss of recurring income could lead a buyer to pull out of a deal.
Mitigate this by diversifying to avoid reliance on one or two large contracts for income. Public sector contracts can be lucrative, but basing the future success of your business on their income is unwise.
Supplier issues
If you know your main manufacturer plans to change their processes or stop manufacturing components your business relies on, you should disclose this to your buyer. The same advice applies if you know a supplier is experiencing financial difficulties. It’s better to be honest than leave your buyer with a huge problem on their hands.
Mitigate this by sourcing materials from a range of suppliers to spread risk, and maintaining good communications and relationships with your suppliers.
Customers changing direction
When customers decide to take their business elsewhere, or change their business focus, it can leave a gaping hole in revenue. Prior knowledge that you are likely to lose a key contract or customer in the near future should always be disclosed.
Mitigate this by avoiding being over reliant on certain customers, and thinking of ways to build loyalty and lock them in for the long-term. Think subscriptions, reward schemes, discounted long-term contracts, or offering preferential rates in return for their commitment. Give your customers a reason to choose you over your competitors.
Changes in your sector
Most buyers are smart. They will be aware of forthcoming fiscal and legal changes affecting the business landscape. Unless they are already active in your sector, they may not be aware of specific changes in your industry. For example, updates to health and safety policy could devalue large volumes of stock in a workwear clothing manufacturer. Shifting fashion trends could render a huge stock holding out of date.
Mitigate this by maintaining good industry awareness and keeping up to date with trends and changes that will impact your business. Consider different scenarios and put contingency plans in place, so you can react quickly.
Why we need transparency in business sales
Honesty and transparency between all parties is essential when selling your business, for several reasons:
- Builds trust and improves communication
- Creates a strong relationship with the new owner, which benefits staff, customers and suppliers remaining with the business after the sale
- Enables an effective handover process and continuity
- Allows the outgoing owner/s to leave on good terms and continue working in the business, if required by the deal.
Be honest about risks and challenges
Our advice: if you are aware of a major change that will affect your business over the next two years, don’t try to hide it. Buyers hate deception.
Being honest and upfront about potential risks and challenges builds trust with your buyer. It puts your business on a strong footing ready for new ownership. When a vendor fails to prepare the new owner for forthcoming challenges, you are putting its future success, and everyone whose livelihood relies on it, at risk.
As business exit consultants, we advise owners on dilemmas like this one every day. To learn more about how we can support your exit, book a free 30-minute discovery call.
