One question that always, always comes up in preparing to sell a business is what to do about communicating “bad news”, meaning any important negative news or information about the business. The question always comes up, because no business is ever perfect, and usually there are one or two historical skeletons in the closet!
This article is part of our multi-part series - A Basic Primer on Selling a Business. See the other parts of this series here.
Examples are things like historical product liability claims that aren’t resolved; any investigations or enforcement proceedings by regulators that are still open; current or historical environmental law liabilities; tense labour relations situations; unsuccessful product launches; and, of course, the list can go on.
Views on tactics on how to handle these types of matters in a business sale process can obviously differ. On the one hand, some people argue that holding information back on such matters (or limiting the amount of it), helps get to better buyer perceptions by not stoking-up excessive attention and concern. On the other hand, others argue that it is best to be direct, clear and up-front in communicating key facts on “bad news” business issues like this. My personal experience, as well as that of my colleagues handling business development at GE, was that the best course of action was always the latter. Business-people know that no business is perfect and that all of them have some warts, and they are experienced in sizing-up problems and managing them. It was our experience that the former approach (of limiting or delaying information on “bad news” topics) simply exacerbated bidder concerns and attention, often leading to requests for special protections in a purchase contract. Similarly, drip-feeding of incomplete information on bad news topics would also end up simply exacerbating bidder concerns (and undermining confidence in the quality of information and disclosure in the sales process overall), as well as typically increasing the amount of time involved in a bidder processing and understanding the “bad news” issue. Instead, we found that it always worked out best to be direct, clear and prompt in providing complete and relevant information on “bad news” issues, so that bidders could more quickly understand and digest them. And one thing is for certain: failing to disclose “bad news” issues in a sale process will often end up in a lawsuit from the buyer, likely ending up far more expensively than having addressed the issue squarely and clearly in the purchase process.
Continue reading our multi-part series:
A Basic Primer on Selling A Business
- Part 1 - Why selling any business is a challenging information-sharing process
- Part 2 - Case studies in selling a business as an information-sharing process
- Part 3 - The role of financial statements and the misguided view that they are all that matters
- Part 4 - What are the key stages in the process of selling a business
- Part 5 - How do people value a business?
- Part 6 - What kinds of information will buyers of a business want to see?
- Part 7 - How to handle the “bad news” about a business being sold
- Part 8 - What legal issues will buyers usually be concerned about when reviewing contracts?
- Part 9 - Summary: An Overview of Business Sale Processes