Putting the weaknesses in yourself

The short version

Every business has weaknesses. Buyers know that, and they will find yours during due diligence.
A weakness you disclose, explain and put in context builds trust.
A weakness a buyer discovers on their own raises doubts about everything else, and often lowers the price.
What you say in the sale documents becomes a legal promise. Leaving out a known problem can cost you after closing.

Why disclose

A buyer's accountant, attorney and lender will go through your business in detail. Anything significant will surface. The only question is who brings it up first.

When you raise it, you control the explanation. When the buyer finds it, they control the conclusion.

The legal side

In the purchase agreement you make formal statements about the business, called representations and warranties. If one turns out to be false, the buyer may be able to recover money from you after closing. Lesson 9.5 covers the purchase agreement.

Disclosing known problems in writing, before you sign, is the main way to protect yourself. Your M&A attorney will help you prepare what is usually called a disclosure schedule.

Common weaknesses worth naming

Dependence on you, or on one key employee.
A large share of revenue from one customer.
A down year, and the reason for it.
Equipment near the end of its life.
A lease with little time left.
A pending dispute, claim or inspection.
Records that were informal in earlier years.

How to present a weakness

For each one, say three things:

What it is, plainly.
Why it exists, in context.
What you have done about it, or what a new owner could do.

For example: "Our largest customer is 28 percent of revenue. They have been with us for 14 years and renewed their service agreement last spring through 2029. We have added eight new commercial accounts in the last two years to reduce that share."

What not to do

Do not bury a weakness in fine print.
Do not spin it into a strength it is not.
Do not leave out something you know, hoping it will not come up.