Regardless of the sweat equity you may have invested in building your business, when you put your business up for sale, a prospective buyer will value your business based on the expected value of its future cash flows.
You may work with a broker who will prepare a Confidential Information Memorandum (CIM), which will highlight the various aspects of your business, and anticipate the buyers’ most frequently asked questions. The goal of the CIM is to give the buyer sufficient insight into your business to decide that it meets their basic acquisition criteria and is worthy of further consideration. Your business won’t be a good fit for every buyer and may be worth more to some buyers than others.
A key question for most buyers is: Why do you want to sell your business? If your business is as profitable and successful as you say, why would you ever consider selling it? Buyers need to be assured that you are not trying to dump your business on an unsuspecting buyer to avoid impending doom. At the same time, they want some assurance that you are motivated to sell and won’t change your mind at the last minute after the buyer has invested a lot of time and money investigating your business and negotiating an offer.
Next, buyers will want to understand how you got into the business, how you’ve grown the business, how you see the business growing in the future, generally how you think about the business, its customers and its employees, and, truthfully, whether or not you’re a reasonable and decent person. While buying a business may seem like a purely financial transaction, in reality it’s more like a short-term partnership between the new owner and the exiting owner, and if those personalities /values are not sufficiently compatible, the deal is not likely to succeed, regardless of how favorable the price and terms.
Finally, they want to talk about how a change in ownership will affect the business, its employees and its customers. The buyer’s goal is to structure the deal and the ownership transition to maximize customer and employee retention and minimize downside risk.
Here are typical questions a Prospective buyer may ask:
- What would your ideal transition look like? What do you want to do post-sale?
- What is your day-to-day role in the business?
- Why do your customers buy from you rather than others?
- How long have your employees been with you, and why do they stay?
- Who are the future leaders in the company? What are their current and potential roles?
- How has the business evolved since you first got into it?
- What capital expenditures should be made in this business annually, and on what?
- What opportunities exist in this market through the next three, five, or 10 years?
When responding to a prospective buyer’s questions, it’s critical to be honest. Any dishonesty will ultimately be revealed in due diligence – if not sooner – and will cause the buyer to question what else you may have been dishonest about, and that growing doubt may ultimately undermine the entire deal.
On the other hand, if you honestly explain how the business works, you will likely find the right buyers present themselves, and you can exit your business on good terms.
If you would like to receive a copy of our white paper entitled: Value Drivers to Maximize the Value/ Selling Price of Your Business, please contact me directly.
As ever, if you know of a business owner who’s thinking of selling or buying a business and who might benefit from a complimentary consultation with us, have them contact me, or any of the M&A professionals at www.transworldma.com.
Mike Ertel, CBI, M&AMI, CM&AA
©2022 J. Michael Ertel PA