A business broker will tell you that putting yourself in a buyer’s shoes will get you a long way towards a successful business sale.
To support your sale preparations, here’s a rundown of 10 common questions asked by business buyers, together with some sensible answers that will put your business in the best possible light (without being dishonest) and help you close the deal.
1. So why are you selling your business?
This is usually a first-up query (though an ultra-smart operator may leave it to the last!). And buyers will appreciate that major life events such as retirement, bereavement and relocation can signal a need to realign priorities.
But if your business has hit a rocky patch, it’s essential that you communicate this information early. Reassure them by outlining what you see as the business’s core strengths and detail development opportunities with some observations about how to realize the business’s potential—perhaps through targeted investment or diversification.
Be absolutely straight with a prospective purchaser and demonstrate realism about its prospects and you’ll gain their trust plus, hopefully, retain their interest in the business.
2. Is the business making a profit?
Most buyers will want to check out your financials before getting too involved. For you, that means providing confirmation—in the form of cash flow and revenue, supported by profit and loss statements—that everything is in order.
If there are any blips, such as a huge loss in a particular year, it helps if you can provide a credible reason—for example, a huge, one-off cost that is unlikely to be repeated.
3. Is your business priced correctly?
Your buyer wants to know how you arrived at your asking price. Whether you employed a multiple of profits, the entry-cost method or discounted net flow, they will also want to know the reasons for your business valuation method of choice.
For example, it might be typical to value businesses in your sector by a multiple of six times’ profits.
Perhaps you’ve added more on top. This could be to account for the real estate, intellectual property or voluminous customer data—whatever it is, the buyer will want to hear a credible explanation.
4. Will your most experienced, talented employees stay on?
Experienced and talented staff will be an appealing prospect for would-be buyers. If you can offer reassurances that key employees are likely to stay on, this will be highly reassuring.
To this end, you might be wise to reveal your sale plans to key senior employees at some point during negotiations so you can give them reasons to commit to the new regime.
The continuity this promises will go a long way towards backing up your growth forecasts and easing anxieties any prospective buyer might generate.
It’s rarely a good idea to reveal your intentions to sell too early, or to all employees. Damaged morale is likely to cause a drop in revenue, so create a plan that reduces your risk, sets a clear roadmap for staff transition and stick to it.
5. Do you get much repeat business?
A healthy customer database is one indicator that the business is in good shape. Naturally, buyers will want reassurance that they can count on the customer loyalty you have built up.
Reassurance could come in the form of lengthy subscription contracts with customers, while retailers with a large database of customer email addresses can offer buyers a large audience for their marketing efforts.
In many ways, a business with a large number of small clients is a safer bet than one with a small number of huge accounts. In the latter scenario, if a single major client were spooked by the sale and took their business elsewhere, revenues could sustain a severe dent within days of the new owner taking over.
6. What challenges is the business facing?
Insist with a straight face that the business has no flaws and the buyer is likely to take you as deluded or worse, a liar.
The due diligence process will likely uncover hidden nasties anyway, so honesty is always the best policy. But there’s a right way and a wrong way to reveal problems.
For a start, they’re challenges, not problems. Offer potential solutions and soften their impact by emphasizing corresponding strengths. For example: “Trade is seasonal—but that frees us up to take more holidays and pursue other interests during the off-season.” Or: “Profits are flat right now—but our research show that extending opening to include weekends would boost profits enormously.”
As a seller you should be upfront with the buyer about anything detrimental, such as employee disputes, customer complaints, legal liabilities and more.
7. Is the business a good fit for me?
With your experience, you should quickly recognize whether someone has the knowledge, aptitude and expertise to make a success of your business. Quiz the buyer on any relevant experience—whether directly in the industry, in related fields or areas which could have instilled transferable skills.
Check if they truly understand what is involved, which is a good test of their credibility as buyers. Are they OK with working weekends? Do they realize that the hospitality industry has high staff turnover?
If the buyer seems ill-suited to the role, they will likely either wreck the business—and with it, your legacy—or withdraw from the deal at the 11th hour when reality dawns.
8. Can you confirm the lease will be assigned?
Continuing existing lease arrangements will be a priority for your buyer if the business is location-specific. Therefore, it’s important to verify the terms and conditions that will apply in the event of a sale – preferably before you put the business on the market.
9. What are your expectations of me as a buyer?
If you have strong views about the future direction of your business, this is your opportunity to clarify those expectations. This could, for instance, include concerns about undermining the business’s strengths through dramatic changes (ie, favoring evolution over revolution) or worries about job security for family members or loyal employees.
A buyer with any sense will be keen to mine the knowledge and experience you’ve accrued over years of running the business.
10. What does your ideal transition look like?
In a similar vein, you may be happy to stay on in a consultancy role for a while beyond the handover to smooth the transition. And you may have an idea of how and when you wish to inform employees, suppliers and major customers about the impact of the changes.
It’s important to clarify your expectations not just of the deal structure—how the deal is financed—but also of how the handover will work. The buyer will have their own ideas too, so hopefully you can reach a compromise.
Author: Melanie Luff, Online Journalist for BusinessesForSale.com, the market-leading directory of business opportunities from Dynamis. Melanie writes for all titles in the Dynamis Stable including PropertySales.com and FranchiseSales.com.