by Chris Hinson
When you are trying to sell your business, of course you want to present it in the best possible light. But if you are aware of any problems, you need to let the buyer know about them as well. Not only can this help you legally, after the sale is complete, believe it or not, it can actually help you sell your business.
You have a legal obligation to disclose all material facts about your business to the prospective buyer. You can expect the buyer to ask you a lot of questions and to ask you to produce a lot of documentation when you go through the due diligence process. (See the related article on due diligence for more information about what to expect.) You will have to respond honestly to all of these requests for information, even if the facts don't look so good.
In addition to responding honestly to requests for information, you may need to make the buyer aware of certain problems whether they inquire about them or not. If you are aware of facts that, if the buyer knew them, would probably affect the terms of the deal, and the buyer is not likely to become aware of them through the normal inquiries, you need to go ahead and tell the buyer about them without being asked. If you don't and the buyer discovers the problem after the sale, you could be sued for fraudulent misrepresentation.
Another reason to be perfectly up front about your business' flaws with a potential buyer. Suppose the new owner is not able to successfully continue your business. If that buyer can't pay his debts or goes into bankruptcy, his creditors may sue you on the theory that your misrepresentations about the business were the cause of the new owner's failure. A court could declare the sale to be invalid and the money you received would go towards paying those debts. It is probably not worth the risk.
On the other hand, a buyer may appreciate your honesty. Just because your business has some problems doesn't mean that they can't be fixed. No business is going to be perfect. The buyer's biggest risk involves the problems that he or she is not aware of. If you are honest and up front about potential problems your buyer is less likely to be scared off by them. On the other hand, if the buyer turns up a problem, whether major or minor, that you weren't up front about, he or she may wonder what else you are hiding. Now that could really kill the deal.
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- Due Diligence: What Should You Expect and What Should You Do
- Laws That Might Affect the Sale of Your Business
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- Tell your Buyer About Your Business's Problems
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- What Should Be In A Letter Of Intent?
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