Full Disclosure in the Sale of a Business

Jul 9, 2019

The cover story (https://www.entrepreneur.com/article/333179) in the June 2019 issue of Entrepreneur Magazine is the story of actress turned entrepreneur Michelle Pfeiffer’s twenty year vision/quest to create a fine fragrance brand that provides full disclosure regarding its ingredients.  Her brand, Henry Rose (https://henryrose.com/), in addition to revealing all of its components, also is certified by the Environmental Working Group (https://www.ewg.org/) and Cradle to Cradle (https://www.c2ccertified.org/) related to its ingredients being harvested using sustainable processes, environmentally friendly, and meeting the highest safety standards.  Best practices in production and full disclosure of ingredients are in the best interest of the public in the manufacturing of products for consumption or application.  This is common sense.

The creation of an environment of full disclosure is also an important component in a professionally facilitated “win-win” transaction involving the purchase & sale of a business.  Caveat Emptor, “Let the Buyer Beware”, is prudent business whether a party is buying an antique, automobile, or business.  IBA, as the oldest business brokerage firm in the Pacific Northwest, has an established reputation for being a market leader in terms of knowledge, experience, ethics, and employing “best practices”.  We will not allow a transaction to be completed where an environment of full disclosure does not exist between the parties.

The following are the benefits for the buyer & seller in a business sale transaction of having the deal completed in full sunlight:

  1. Entrepreneurship has enough challenges without having to navigate around known issues that were not disclosed.  It is recommended that any party purchasing a business complete a comprehensive due diligence process prior to completing the acquisition.  The transition of ownership and strategic planning for the future will be achieved with better results if a quality conveyance of information occurs in a business sale.  If a seller will not share information, that is a large red flag and the buyer should proceed forward with extreme caution.  If buying a business for a first time, it is recommended that consultation occur with your attorney & accountant regarding what should be reviewed during due diligence prior to a business acquisition.  There are many due diligence lists available online to guide the process. The following is an example of an online due diligence list of questions and document requests associated with buying a business:  https://www.accountingtools.com/articles/2017/5/4/acquisition-due-diligence-checklist
  2. Many entrepreneurs grow frustrated when they are asked to produce a significant amount of information and documentation during due diligence. This is 100% the wrong attitude to take during due diligence.  Full disclosure and a comprehensive due diligence are the best friends of the seller in a transaction. The reason this is true is that the one item that cannot be sold in a business sale is the management ability, knowledge, and experience of the seller.  A quality due diligence and transition period can enhance the conveyance of knowledge to the business buyer, but a truism in mergers & acquisitions is “New ownership will be better or worse than prior ownership, they will not be exactly the same.”  A comprehensive due diligence helps mitigate post transaction liability for the seller if the business struggles post sale because of new executive management.  It is very important in a professionally facilitated transaction that any future turbulence for the business post sale be because of new management decisions and not undisclosed information.
  3. Full disclosure in a transaction also enhances the probability of securing financing to support the acquisition. Bank underwriting departments are traditionally conservative in their analysis and desire to look under stones.  This is prudent because they are the gatekeepers to the bank’s money and want to mitigate post funding loan issues.  It is in the best interest of a transaction to have the buyer and seller work collaboratively throughout the financing process.  This often includes open communication from the buyer to the seller regarding what is needed by the bank to complete the loan, the timing of loan funding benchmarks, and bank requirements that will impact the seller.  We often say at IBA, “A deal will not close without a bag of gold.”  A high percentage of the time, the bank will possess a yeoman’s share of the gold needed to complete an acquisition up to closing.  It is strongly recommended that a red carpet be rolled out for the bank and an effort made by both the buyer & seller to take an arm of the bank and escort them down the carpet to closing.
  4. A comprehensive due diligence is also in the intermediary’s best interest. A “sell side” business brokerage firm like IBA often parrots information provided to us about the business from the seller.  If bad information enters the conversation, bad information will be conveyed.  A transaction facilitated in full sunlight with a comprehensive due diligence process mitigates post transaction liability for the intermediary.  It is difficult to blame a business broker for supplying bad information, if a document trail sourcing the information to the seller is available.

Michelle Pfeiffer recognized that the perfume industry needed better ingredient disclosure practices and created a company to employ “best practices”.  45 years ago a group of experienced, knowledgeable, highly skilled business brokers created IBA to provide professional sales representation to entrepreneurs employing best practices.  Today, IBA continues to be a market leader in terms of professional, “sell side” intermediary services for entrepreneurs with main street & middle market companies.   We would welcome the opportunity to participate in an interview process related to business broker selection. We will answer all questions honestly with full disclosure.  We are confident at the end of the interview it will be evident why we have sold more businesses than any other firm in the region.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.