Disclose All Material Facts
Unlike the sale of a home or piece of real estate, the sale of a business involves material facts that change over time and are impossible to discover without the seller’s full cooperation. The seller or business owner is bound to disclose all material facts which affects the valuation of their business and which may influence the buyer’s decision to purchases the business. By doing so, the buyer may make an informed offer and the business owner will not put themselves in legal jeopardy after the closing for breach of contract. Ethical considerations also compel most business owners to be fair and up front with all prospective buyers. As a practical matter, disclosing all material facts establishes trust and credibility with prospective buyers. It is far better to disclose problematic issues about a business as early as possible rather than waiting until the buyer inevitable discovers the problems anyway during the formal due diligence process.
Disclosure Occurs in Stages
Business owners should be aware that disclosing most information and financials of their business is done in stages. The first stage discloses the least amount of information in publicly viewed ‘blind ads’ which shield the identity and specific location of the business. Then a prospective buyer may be given further information after they are qualified by signing a Non-Disclosure Agreement (NDA) and providing proof of funds. At this stage, they should be given a historical financial statement (tax returns or profit and loss reports), a physical asset list, and a thorough description of the business along with its competitive advantages in the marketplace. Ideally, the buyer should be able to make an offer based on this information. The final stage occurs after the buyer’s offer is accepted and the deal goes to formal due diligence where any and all available company information should be made available.
Financial Disclosures
Unless a business sale is an ‘asset sale’ with no advertised profitability, financial disclosures must be made to the vast majority of buyers in order for them to make an informed offer. The more transparent, organized, and logical the financial statement, then the more likely it is that a buyer will be able to make a fair offer that will hold up during the formal due diligence phase. Concealing or altering financial information to a buyer is not only unethical, it is also counter-productive since the buyer is bound to discover any discrepancies during formal due diligence. Buyers will examine bank statement, payroll records, customer invoices, and POS (point of sale) reports in order to substantiate the sales and profits recorded in the financial statement. A full and honest disclosure of the financial condition of the company prior to formal due diligence makes it far more likely that the business deal will actually close.
Physical Asset Disclosures
The physical or tangible assets of a business may include equipment (vehicles, trailers, machinery), inventory (saleable items or raw materials valued at cost), and leasehold improvements attached to the premises. Physical assets are almost always sold on an ‘as is’ basis in most business deals so long as they are in workable condition. Buyers should be given a physical asset list of included items in the sale prior to making an offer. The asset list should describe the major pieces of equipment, and give approximate current valuations for all of the included assets. As with financial disclosures, the physical asset list is subject to formal due diligence by the buyer after an offer is accepted. During the formal due diligence phase, buyers may personally inspect and examine all of the physical assets so long as the inspection does not interfere with the company’s normal operations.
Disclosure of Liens or Debts
Business owners should always disclose all debts, liens, and legal claims against the business as a part of complying with the buyer’s formal due diligence prior to closing. Debt holders invariably file a Uniform Commercial Code (UCC) lien against a business as a way to protect their security interests. Anyone may do a UCC lien search online (at no cost) to discover past and current liens filed against a Florida company. It is thus always wise to disclose all debts and liens up front to a perspective buyer. Similarly, legal claims or litigation against a business is also discoverable through online searches. As a practical matter, business owners will want to settle or extinguish all legal claims prior to closing. Since the vast majority of business sales are sold on a ‘cash free debt free’ basis, company debts are invariably paid off and any liens are extinguished at closing.
Disclose Opinions?
Contrary to the disclosure of material facts, it is not ethically or legally required to disclose opinions or assurances about the future condition or future performance of a business. In the purchase agreement, some buyers insist that the seller provide ‘representations and warranties’ (also known as ‘reps and warranties’) which gives facts (reps) and assurances (warranties) about the business. The seller may be held liable for breach of contract in case the reps or warranties turn out not to be true. While business owners commonly give representations about the business (verifiable by the buyer during formal due diligence), most business owners justifiably do not want to give warranties about the future condition or performance of the business not under their control. As a general rule of thumb, it not wise for sellers to give opinions or assurances to a buyer about future outcomes related to the business.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.