17 Dec 5 Questions that Business Buyers Should Ask, but Usually Don’t
In my previous blog I shared five questions that almost every buyer asks about a business that they are considering buying. Here are five questions that buyers should ask, but often don’t.
When did the owner decide to sell the business?
Business buyers always want to know why the target business is for sale. Owners usually respond with a stock answer about retirement or “taking care of other business interests” that may not reveal much to the buyer. An even better question may be to ask the owner when he or she decided to sell.
For the best-run businesses, the idea to sell didn’t just pop us but came as the result of a well-thought-out, multi-year plan conceived by the owners as a means of achieving their personal and business goals. If that’s the case, the owner should be able to describe the plan to the buyer and maybe even show them the plan.
On the other hand, if the owner’s decision to sell the business happened suddenly, that could be a red flag that the business is in trouble, there are looming financial threats, or there are other internal problems in the business, perhaps even a partner disagreement.
What valuation method did the owner use to determine the price?
In a typical business acquisition, the buyer and the seller find their own valuation of the business. The buyer is going to rely on their own valuation when they make an offer, but it will help them to know how the seller valued their own company and arrived at an asking price (if there is an asking price).
Negotiating the price will be smoother if both parties can talk about how they estimate value. The seller may be using a simple asset-based method, an income capitalization method, an owner’s benefit method, a market multiple method, or a combination of methods. Sometimes the truth comes out that the asking price was not based on the underlying value of the business, but by what the seller wanted or told his family he would sell the business for.
What does the owner want in order to walk away from the business?
It’s important for the buyer to try to discover what really matters to the seller, besides the price. The seller probably won’t disclose the minimum that she will accept at the beginning of the negotiations, anyway. At the very least, buyers who are willing to ask what the buyer wants will begin to get an idea about the seller’s non-cash motivations. Most small business owners are just as concerned about the business’ future as they are about how much money they will make on the sale. The seller’s non-cash motivations can be a powerful negotiation tool for buyers. When the negotiation process hits a wall, knowing everything that is important to a seller can sometimes close the deal.
What would the seller do to grow the business and increase profitability?
Buyers need to be realistic about the prospects of a target business, yet they must also understand the potential in order to take the “leap of faith” to buy it. The person who is most qualified to offer a realistic perspective about the business and its future growth prospects is its owner. Yet sellers often prefer to paint a rosy portrait of the company rather than simply telling it like it is. One of the ways a buyer can break through a reluctant seller’s defenses is to invite the owner to make suggestions about how to increase capacity, market share, and profitability. With the right approach, a buyer’s appeal to owner expertise can change the seller’s posture from defensive to collaborative.
Is the seller willing to sign a non-compete agreement?
An established customer base is one of the reasons existing businesses are so attractive to buyers. That incentive disappears if the buyer is concerned that the seller can take the company’s customers (or employees) with him. The best way to find out is for the buyer to request a contractual non-compete agreement. If the seller refuses, the buyer should either walk away or proceed with extreme caution. On the other hand, if the seller readily agrees, the existing client base can probably be used as a reliable gauge for financial projections.