What’s Your Downside? The Truth About Honesty

Steps to Selling your Business Part 11.

When you tell your company’s story to prospective buyers, make sure you are not hiding anything. This is simple enough advice; most of us have had enough life experience to know that honesty truly is the best policy. There are checks, safeguards, and penalties in place against outright dishonesty in the sale process for those who haven’t.

Nevertheless, when you’re examining all the moving parts of your business with granular detail, you will become painfully aware of all the pitfalls of your business, both large and small. No company is perfect; they are always there: the risk factors, the value drivers that aren’t entirely performing, the holes in the profit projections that you wish weren’t there. You may find yourself in those moments wishing for a magician’s misdirect—a brightly colored flash from the hand pointing at profits, with the risks tucked away in a hand that no one is watching. This sort of sleight-of-hand may fall short of dishonesty (we are not convinced that it does), but in our experience, it usually comes back to bite you. The truth is that there isn’t a downside to being honest about your pitfalls.

An experienced M&A Advisor will make the apparent downsides in your business’s story into positive factors in the final sale.

Full disclosure is critical because buyers will figure everything out, eventually. Is that one key value driver running at 75 when it should be at 100? Yes, that might be a negative that you may have to explain or which impacts the offers you receive; however, you must disclose it, nonetheless.

One of the most important services we perform for clients is searching for the right buyer for your company. This means matching a buyer with the growth potential and positives you are offering, along with the negatives and risks that come with it. These prospects are business people, just like you. They know how to see shortcomings as opportunities; they might even get excited about them. Disclose it to them, show them the right way to look at it, and buyers will work with your risk. Aim to keep their eyes off your risk factors and potential negatives, though, and they will spot them. When they do, they will still work with your risk, but not in your favor. We have seen this happen, with buyers coming in with a revised offer – in the wrong direction.

As your Advisors, when we put your business’s narrative together, we also develop the strategy for connecting that story to a great deal. We want to put your downsides on the table so they can be examined and perfectly understood. This will position you as a trustworthy partner for potential suitors. 

In all deals, someone in the transaction will develop a narrative that explains the risk factors in your reports. You want to be the one shaping that narrative. Again, we are not talking about dishonesty here. The fact is, there may be a natural area of risk or instability in your company that cannot be told as anything else. We still report it clearly and openly. 

A great M&A Advisor knows how to talk about these risks correctly. They will highlight the opportunities that are attendant to that problem, change how your buyer thinks about risk, and protect your final valuation in the process.

A few years ago, we successfully sold a business. It was quite profitable; there were many value drivers to attract prospective buyers; however, they had one glaring downside that we had to consider. 

The company had a 50% customer concentration. Half of their total revenue came from a long-time, single customer on a 2-year renewable contract. We expected this to set off alarm bells and maybe even scare off some potential buyers. However, we still made the risk factor fully visible in our reports, and we positioned the customer concentration favorably. Since we were the ones who shaped the narrative, we were ready for any questions or pushback. True stories don’t fail when they are examined.

We told this company’s story to the right prospective buyers. We walked those buyers through the exciting prospects and profitability, and we walked them through the risk profile. The offers started to come in. 

The company received three offers and sold for over five times its earnings in an all-cash deal. Our client received this sale price because we didn’t hide the risk factors. We told the right story about it, and then we put the right eyes on it. We matched the seller with a buyer who had a pre-existing relationship with that same 50% customer. What was once a considerable negative was, in fact, an attractive positive for one particular buyer. They knew the people and were confident they could keep that contract. (They did).

We believe that a commitment to this kind of honesty and disclosure has a vast amount of power in the marketplace. 

When you’ve built a deal on an honest foundation, it rings true to people, and good business people notice that. It’s a matter of integrity that we have built into the way we do business. 

Honesty is the best policy. It optimizes conditions for a great final sale, and more importantly, it lets you move forward with the knowledge that you conducted your business with integrity right to the very end. That is a fantastic way to walk into the next chapter of your life.

If you are planning to divest your business, or have questions for one of our Advisors, please contact our team today.

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Written by: Douglas Nix