There comes a time, in the life of every company, when something bad happens. Whether something is deficient or someone else tried to take a piece of the action, every entrepreneur has gone through a time they would prefer to forget.
So when you’re trying to sell the business — or pitch it to investors — at some point you are going to have to bring up the bad stuff. If you don’t, they’ll find the skeletons in the closet themselves.
What I’ve found through running a firm that helps online business owners sell their companies is that the best move is to get in front of your mistakes and own up to them. However, this can be scary, and you don’t want to destroy a potential deal.
So when it comes to dealing with the ugly stuff in your business’s past, follow these three simple steps.
1. Own the ugly
You have two choices: Hide the ugly parts of your business and hope no one goes digging, or embrace the negatives from the beginning. Show the potential investor or buyer that you are not afraid to honestly appraise the business. As a result, you will convey respect, and hopefully they will too.
As David Teten, a partner with venture capital firm FF Venture Capital, says: “If you’re talking with an investor competent enough that you’d want her to invest in you, that investor will also be competent enough to surface the negative information you’re trying to hide. By surfacing the negatives early, you help establish a relationship of mutual trust and respect.”
When an investor or buyer inspects your business, the tendency is to balance both reasons why your business may be a good investment against any reason why it may be a risky one.
In other words, while an investor or buyer may be tempted by the opportunity, they are still looking for all the reasons they should possibly say “no.” For this reason, at Quiet Light Brokerage when we represent an entrepreneur who wants to sell their online business, if there are major problems we make sure to tackle those negatives head-on.
For example, I recently represented an online magazine whose previous 12 months saw a decline in revenue. We spent a lot of time analyzing the root cause so that we could identify potential solutions. As a result, fewer potential buyers mentioned those declining revenues as objections.
2. Share how you handled the negative aspects
A pitch won’t be compelling if an investor is only left with a sense of all that is wrong with your business. So it’s important to show investors what impact those negatives have had on the business as well as how you dealt with them — or plan to deal with them in the future.
Remember that investors want to be on your side. They’re looking for good investments. So if you can explain how to correct or mitigate the bad stuff, they’ll be inclined to agree.
Chris Young from Revel Partners makes this point in FastCompany: “Your investors are on your side. When you win, they win. You’re running a startup, which means that investors don’t expect everything to go smoothly. No one likes hearing bad news — or delivering it. But investors would rather hear bad news now, when there’s an opportunity to fix things, than later when there isn’t.”
So when you address the bad news in your pitch, don’t just let it sit there like the elephant in the room. Instead, explain how being proactive can overcome or minimize the risk.
3. Explain how the problem is an opportunity
Some bad news is just bad — you need to take a deep breath and own up to it. But what you or others may see as problems in the business could actually be spun as opportunities, if you shift your thinking.
When we help a client sell their business, we look for areas where an investor can find quick, natural growth. Often, these are areas that the existing owner sees as problems or deficiencies. For example, we recently represented an e-commerce website that had hundreds of thousands of dollars in inventory. Their order fulfillment operations restricted growth and significantly drained resources.
So we worked with our client to determine whether a third-party logistics company could replace his fulfillment option. The result for investors was a lower cost profile, less management overhead and more freedom to scale faster.
As entrepreneurs it is in our nature to be optimistic. We are driven by successes, not failures. But when it comes to pitching our companies, it’s important to spend a reasonable amount of time addressing the bad stuff.
This doesn’t mean you should convince an investor that your business is a bad investment. In fact, do the opposite — explain how the bad stuff can be overcome, how your business is resilient, or how it may be an opportunity for growth.
If you do this, you will come across as reasonable, intelligent and competent.
This article has been edited.
Mark Daoust is the founder and CEO of Quiet Light Brokerage, an internet business brokerage firm advising entreprenuers on the exit of their e-commerce, SaaS, Amazon, and other web based businesses. Mark is also the author of the recently published Ultimate Guide to Website Value. Connect with @markdaoust on Twitter.