When planning for the sale of your company, it is important that you are prepared to respond convincingly to a variety of key questions that potential buyers will ask. This article lists many of the questions you will have to answer and the reasons they are important.
It is natural for an older business owner to sell, and there also are reasons (burnout, divorce, partner issues, health problems, other business interests, etc.) that younger business owners want or need to sell. A buyer will usually ask what is motivating the sale in order to learn the specifics surrounding why the company is for sale and to have an honest conversation with the seller. If the seller shades the truth and has a hidden agenda, it will usually be flushed out during the due diligence process. Building and maintaining trust between the buyer and seller are critical to a successful merger and acquisition transaction. If there are issues motivating the sale, it is important to communicate them up front and to recommend solutions to mitigate their implications where possible.
This is a question that M&A advisors and buyers often ask sellers. In my experience, sellers who can’t articulate their plans with some degree of passion aren’t as committed to the process of selling as those who have given this question some thought. Owners who go through a comprehensive exit planning process will have determined their post-sale goals and thus are able to communicate their plans with conviction.
This is another question that is designed to determine why a business owner is selling. As a seller, make sure your answer is not at odds with the reasons you stated for selling now.
Acquiring a business is a time-consuming and expensive process. When a buyer commits to merging or buying a business, the focus and effort required to complete the transaction most often preclude the buyer from investigating other potentially attractive acquisition opportunities. Therefore, it is important for the buyer to be convinced that all the shareholders are committed to selling and are realistic about price and deal structure.
Would you consider selling a portion of your business?
Financial buyers (e.g., private equity groups) are often more attracted to sellers who are interested in retaining a minority equity interest in the company following the acquisition. Sellers who maintain a minority interest in the company communicate the message to the buyer that they strongly believe in the company’s future. Buyers also like this because they believe that it aligns the mutual interests of the buyer and seller moving forward.
Who are your key management personnel, and are they committed to staying after closing?
Companies with a deep, experienced, committed management team are more sought-after and valuable than their counterparts. Buyers will want to determine whether one person controls a material number of the company’s customer relationships or is critical to the ongoing profitable operation of the business. Retention of key customers and critical personnel following the sale of the company is always important to a buyer because losing one or more of these critical resources after closing could significantly undermine the company’s performance or sink the business. Sellers should make sure that key personnel have strong, defensible non-compete and non-solicitation agreements. Often times a seller will pay “stay bonuses” to key personnel to ensure that they continue with the company after the closing.
Who owns the relationship with your key customers?
Buyers will want to know who within the selling company is primarily responsible for establishing and maintaining relationships with key customers and what the likelihood is that the customers will continue to buy from the new owner. Sellers who own the relationship with major customers will likely see a significant earn-out component in the buyer’s offer for the company. The earn-out component will usually be structured to pay the owner over a period of one to three years. Payment will be made if performance meets predetermined criteria.
Why is your business trending the way it is?
Be prepared to have a defensible story as to why your business revenue is trending as it is. Is it the result of the market cycle? Is it a new strategy, product line, recent acquisition or marketing program? Whatever it is, be prepared to help the buyer get his/arms around the likelihood of the positive trend continuing or to explain how changes you have recently implemented have started to reverse a negative trend.
How do you win business?
This is a question designed to determine whether the company wins business primarily due to personal relationships, price or its competitive advantages (e.g., better overall value proposition). Companies that win business based on personal relationships or price are perceived as riskier and will typically receive a lower business valuation from a buyer.
If you had unlimited financial resources, how would you grow your company?
Buyers value a business based on its historical performance combined with what they see for synergies, cost savings and the ability to grow the company’s revenue and profit margins. Sellers shouldn’t automatically assume that a buyer knows how to grow the company. Being prepared to discuss what strategies and tactics you would pursue if you had the available financial resources might give the buyer the confidence to make an offer at a valuation higher than what they originally considered.
Are your financial forecasts achievable?
Sellers presenting financial forecasts to buyers are wise to make sure the projections are achievable. This is especially true for current year financial projections. Buyers will request interim financial statements. Presenting actual results that beat projections should make the buyer and its financing sources (i.e., banks, mezzanine firms) more confident in the management team and in the credibility of the valuation offered. If an earn-out is part of the transaction structure, achievable future financial projections become critical. Because of this, presenting projections that generate buyer interest must be balanced against the ability of the company to achieve them.
What are your valuation expectations?
This is a difficult question to answer for owners who are selling the businesses themselves. Giving a specific number may result in the owner undervaluing the company (i.e., leaving money on the table) or cause a qualified buyer to terminate its interest because of the perception that the valuation is too high. If an owner is represented by a merger and acquisition advisor, the owner should defer this question to the advisor. An experienced M&A advisor will say that the market will determine what the company is worth. This sends a clear message to the buyer that it will be competing with other buyers for the company and that it must make a strong offer that also addresses the seller’s other goals.