Owners preparing to sell their company should be prepared to offer comprehensive, believable answers to the questions buyers often ask. At the heart of these questions is a desire to understand why the owner wishes to sell, whether there is a hidden agenda, and the extent to which the buyer can rely on assertions made by the owner.
Buying a business is a time-consuming, costly process. Buyers who commit to purchasing or merging a business typically cannot then spend those resources on another business. That’s why due diligence is so important, and why buyers may ask intrusive questions. Sellers must understand that the buyer is trying to minimize risk with these queries. At minimum, they should be prepared to answer the following questions:
Are you willing to sell the business in pieces?
Financial buyers are often interested in sellers who maintain a minority interest in the company. This clearly conveys that the seller is committed to and believes in the future of the company. This strategy aligns both parties’ interests, making the business more attractive to some buyers.
Do you have good management in place?
Buyers want to know that you have a skilled management team in place who can run the business without you. They’ll also want to ensure that the team has been properly incentivized to remain with the company following the sale.
Who has the relationship with key customers?
Relationships are “owned” by someone. Buyers want to know with whom customers have the relationship, and whether those customers are likely to remain on board after your departure. If the owner owns most customer relationships, then the buyer may want to structure an earn-out to help keep customers on board during the transition.
Can you explain trends in your business?
No matter which direction your business is trending, the savvy buyer is going to want to know why. Be prepared with a clear, believable, coherent story. Otherwise it all looks like an accident. Accidents don’t inspire much faith in buyers.
How do you get new business?
Buyers want to know what you offer. Is it a clear and measurable product, or does your business center around your relationships? Companies that garner business based on strong relationships or low prices carry more risk, and will typically be valued lower.
How would you grow your company if money was no object?
Buyers look to historical performance, potential synergies and cost savings, and growth potential when valuing a company. Sellers should not assume that a buyer knows how to grow the business. Instead, they should offer insight into how the business might grow with more money, time, or team members. Be prepared to discuss the strategies you might pursue in the future, or that you would pursue if you had sufficient resources.
Do you have reasonable financial forecasts?
Financial forecasts can tell many appealing lies. Buyers want the truth. They want to minimize risk. They’ll carefully examine current year projections and interim financial statements. Providing actual results that are superior to projections can inspire great confidence in the buyer, and even help with financing. For sellers considering an earn-out, achievable financial projections are critical to everyone’s success. So balance the need to offer projections that garner buyer interest with the ability of the business to bring those forecasts to fruition.
Are your valuation expectations reasonable?
Owners selling their own companies may struggle to answer this question. Owners who offer a specific number may undervalue the business, or lose buyer interest if the valuation is unreasonably high. An owner represented by an M&A advisor should instead defer to the advisor’s understanding of valuation. The right advisor will help the owner understand the role of the market in determining valuation. They can also initiate a competitive bidding process that encourages buyers to make strong offers that address other goals of the seller.
About Sunbelt Atlanta
At Sunbelt Atlanta our team is made up of seasoned professionals with more than 60 years collective experience selling companies. Our backgrounds and industry experience are as varied as the companies we represent. Some come from main-street, some from wall-street. Collectively, we have closed more than 500 transactions and the companies we have sold range in size from $50,000 to $25,000,000 in transaction value and span all industries. One thing our professionals have in common is that they all have first-hand experience initiating, negotiating and managing the deal process. We can bring a main-street tenacity to a middle market transaction and middle-market finesse to a main-street transaction.