Questions Buyers Ask

When pursuing the sale of your company, it is important to be prepared. Being prepared not only means getting your books & records organized and preparing a quality descriptive executive summary of your company, it also involves educating yourself to properly address the common questions of prospective acquirers.

The following are some of the most frequently asked questions posed by potential acquirers, along with suggestions on how best to address them. Never fabricate answers even if you perceive the truthful answers to be a "negative" toward selling your business. Assume that the truth will be revealed during due diligence and there is no way to recover from being caught in a lie or gross exaggeration. Proper presentation of these issues at the outset can minimize the negative impact on the buyer’s perceived value of your firm.

Why are you selling your business?
Buyers are always concerned as to the actual motivating factors behind the sale of the business, to verify that no "hidden agenda" exists. A prospective buyer would typically prefer a situation in which the seller is of retirement age and does not have any children working in the company. There are many valid reasons to sell a business at a young age (health, divorce, relocation, burnout), however it is more challenging to provide the buyer with a comfort level as to the motivating factors, when it is not as obvious. You should be comfortable and confident when articulating your reasons for wanting to sell.

What will happen when your customers realize that you sold the company?
Acquirers are fearful of the customer goodwill that resides in an owner - and the risk factor that it may evaporate or erode once the owner sells the business. Small and mid-market client relationships are often built on strong personal relationships. The acquirer must assess the ability and likelihood of transitioning ownership without alienating customers. To the extent that a reliance exists, it is key to educate a buyer that the business is not dependent on any one or two major customers. You must be prepared to address questions relating to sales concentration or percentage of sales by customer.

In the event that there are a few large customers representing a large percentage of the business, it is critical to let the buyer know that you will devote a significant amount of time to work together with the buyer following a sale in order to adequately transition these relationships. If appropriate, demonstrate that the primary reason for customer loyalty and longevity is due to the level of quality, service and/or pricing and not merely because of your past relationship. Furthermore, it would be helpful if you can show that the employees have the primary contact with the customers or that there is a reason for that the customer is just as dependent on maintaining the business relationship with your firm.

Who are the key employees?
A primary objective is to verify that there are sufficient people and processes in place to manage the firm after the departure of the current owner. A secondary objective can be seen in the re-phrased question: "Is all or part of the business dependent on any of the employees, and what happens if they leave?" Buyers have to be concerned that the company retains the personnel required to operate to historical standards after the sale.

The existence of non-compete agreements helps address this concern. In the absence of non-compete agreements, your answers must address the lack of dependence on the employees and the ability to replace key employees in the event they choose to leave the firm.

Normally, your employees feel the greatest amount of insecurity at the prospect of a sale to a 3rd party; therefore it is important that the buyer be educated as to the ideal timing of the news coupled with your presentation of the long-term benefits provided by the new ownership. The acquirer must then provide the necessary reassurances as to what to expect following the transaction.

Why has the business been increasing (or declining) in recent years?
Acquirers will always look for trends in the sales, gross margin and profitability of the business. Although there is no guarantee that the past predicts the future, it is a reasonable starting point to forecast (and value) the business for transactional purposes. Buyers will generally assume that these positive or negative trends will continue. In cases where there was been a downward trend, be prepared to identify the reasons for what took place in the past and why this trend may (or may not) turn around. If interim year-to-date sales and profits are increasing, be sure to highlight the story behind the numbers.

What do you project the revenue to be in the coming year?
Be prepared with sound projections based on reasonable assumptions. Be careful not to be too aggressive or unrealistic. This could lead experienced buyers to suggest that a portion of the purchase price be contingent on these projections materializing following the sale. It is always preferable to have an acquirer be positively surprised by interim results during the process. Also be careful to distinguish forecastable growth from existing products and services to the "theoretical" growth from a new offering that has yet to be proven.

Is there growth potential and how do you suggest that I expand this company?
This is an important question when considering the viability of a purchase. Businesses are usually bought with the intent of growing them to higher levels of sales and profits rather than maintaining a stagnant position. If buyers don't believe they can expand the business, most will not be interested. As a seller it is critical to present the most viable expansion opportunities for the business. Be careful not to over do it because the less viable expansion opportunities will tend to dilute the more likely methods.

Two to four ideas listed in order of importance will suffice. A typical follow up question will be "why haven't you pursued these expansion strategies?" -so be prepared. It is perfectly acceptable for the seller to share that at this stage, they have been comfortable with the size of the company and expanding the company has not been a priority. Another acceptable reason is that you may not want to take the risk of making significant financial investments to expand the company. If that were a valid reason, it would make sense to be able to identify what opportunities exist for an acquirer that is capable and willing to commit the capital necessary to take the business to the next level.

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