You may be eager to sell your business, and happy to have an acquirer at your doorstep, but are you prepared for what happens when a sophisticated acquirer starts looking “under the hood” of your business?
Most business owners are ill-prepared for the barrage of invasive inquiries that a sophisticated acquirer will make before finalizing an offer. As a consequence, more business owners are not in a strong position to negotiate the best possible price and terms for their business.
For example, most privately held businesses keep their books and manage many of their personal expenses with the primary objective of minimizing taxes. As a consequence, their books and tax returns don’t accurately reflect the true value of the business. Proving the capacity of your business to generate an attractive cash flow for a new owner is not complicated, but it does take time and meticulous documentation.
Additionally, sophisticated business acquirers will have a checklist of questions – both objective and subjective – that they need answered before getting serious about buying your company.
Examples of objective questions include:
- When does your lease expire and what are the terms?
- Do you have consistent, signed, up-to-date contracts with your customers and employees?
- Are your core business processes well documented?
- Are your ideas, products and processes protected by patents or trademarks?
- What kind of technology do you use, and are your software licenses up to date?
- What are the loan covenants on your credit agreements?
- How are your receivables? Do you have any late payers or deadbeat customers?
- Does your business require a license to operate, and if so, is your paperwork in order?
- Do you have any litigation pending?
Then they’ll try to get a subjective sense of your business, including figuring out just how integral you are personally to the success of your business. And that requires some investigative work as well as some expert probing. For example:
- Mystery shopping
Acquirers often conduct their first bit of research before you even know they are interested in buying your business. They may pose as a customer, visit your website, or come into your company to understand what it feels like to be one of your customers. Make sure the experience your company offers a stranger is tight and consistent, and try to avoid being personally involved in finding or serving brand new customers. If a potential acquirer sees you as the key to wooing new customers, they’ll be concerned that business will dry up when you leave.
- Checking to see if your business is “vision impaired”
An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, he or she may ask the same question of your employees and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.
- Asking your customers why they do business with you
A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and will therefore expect to hear good things. The customers may be asked a question like ‘Why do you do business with these guys?’ The acquirer is trying to figure out where your customers’ loyalties lie. If your customers answer by describing the benefits of your product, service or company in general, that’s good. If they respond by explaining how much they like you personally, that’s bad.
You may not be looking to sell your business any time soon, but it’s never too early to prepare your business for sale, and anticipate the questions a sophisticated acquirer would be asking you, your employees and your customers.
If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a complimentary, confidential, consultation with us, have them contact me directly.
Mike Ertel, CBI, M&AMI, CM&AA
©2021 J. Michael Ertel PA