Preparing for Questions Buyers Are Likely to Ask

When navigating the sale of your business, potential buyers will seek confirmation on various aspects of your business. Your role as the seller is to anticipate and address these questions to instill confidence in your business. Some of the top questions buyers ask about your business during the acquisition are:

• That it delivers immediate cash flow.
• That it is a going concern with an established infrastructure.
• That it is in strong financial condition backed by good historical data and financial statements.
• That it has a broad-based, loyal, and transferable client base and workforce.
• That operations can be transferred to and assumed by a new owner with few or no transition hiccups.

Your confidential information memorandum should present the facts that deliver these assurances. Beyond that, however, there are common questions buyers often ask that you should be prepared to answer.

Why Are You Selling?

What do you plan to do after the sale? If you do not have a clear and ready answer, the buyer can jump to the wrong conclusion and think your business is in distress and you want out. In truth, most businesses sell because the owners are either burned out or tired. Even that truth can be presented positively, with a statement such as, “After 15 years, the business is in great shape, and it is time for me to turn it over to a new owner with fresh energy and ideas to take it to the next level.”

If your sale is prompted, at least in part, by the fact the business is struggling, focus on its prospects and why you want to place it in the hands of someone with the energy and talent to pursue the opportunities in the turnaround or repositioning plans that you will share with the new owner.

How Much Do You Earn from the Business Annually?

Money is a major factor in business sale decisions. Most buyers seek businesses that assure a great job and income for the owner, along with a good return on investment.

The best way to answer the “how much does it earn” question is with verifiable facts presented in your seller’s discretionary earnings (SDE) or EBITDA statement, which should be included in your selling memorandum.

Seller’s discretionary earnings, also called SDE, annual earnings, or owner’s cash flow, differ from annual business profit on your income statement, which deducts all possible expenses to arrive at the lowest-possible taxable income. Seller’s discretionary earnings reflect the amount of potential earnings available to the business owner based on the company’s normalized earnings and owner salary.

Working from the business income statement, the calculation adds back deductions for owner salary, auto use, memberships, and other personal and non-business-related expenses. It also adds back discretionary expenses another owner may not make, expenses for non-recurring purchases, and expenses for interest, depreciation, taxes, and amortization.

The result is how much the owner earns annually from the business. This is the number buyers want to see. If they are looking at several businesses, it is the number they will use as a basis for comparison.

Is Your Asking Price Reasonable?

Be ready to share your pricing rationale. If your business has been professionally appraised, share the report summary. Also share:

• How you arrived at the earnings multiple used in initial pricing, which includes assessments of the strength and attractiveness of your business.
• How your sale price compares to prices of similar businesses in your market area and industry or business sector.
• The value of tangible assets. This allows the buyer to see that a portion of the price is backed by physical fixtures, furnishing, and equipment.
• The value of intangible assets. This gives you the opportunity, again, to present the value you place on your workforce, loyal clientele, business operations and processes, intellectual property, brand name, marketplace and online presence, and brand reputation.

Address the pricing question with a good explanation, and see it as an opportunity to present the full strength and value of the business you are selling.

How Much Has Your Business Grown Over Recent Years and What Do You See for Its Future?

Buyers know that past performance is a good indicator of future prospects. Be prepared to share facts and present the following:

• Recent sales and earnings, which can be presented in a graph that charts the past 3-5 years of financial trends. If your business experienced any down years, be ready to describe circumstances and how they were addressed.
• Number of customers added over recent years, including information on customer loyalty and customer descriptions.
• Number of staff added, perhaps accompanied by a description of improvements in earnings per employee over recent years.
• Operational or equipment improvements that have enhanced efficiency and effectiveness, and increased production and profitability.
• Price increases that have been favorably accepted.

Also share other growth indicators, such as expanded facilities, improved ratings by industry evaluators, positive customer reviews, favorable publicity, and other facts that demonstrate increased business strength.

Is the Business Likely to Transfer Easily and Run Successfully After the Sale?

Transferability is a major concern to buyers, who want assurance that passing the business from one owner to another will be smooth if not seamless. Be prepared to address the following transferability concerns:

• Is the business location secure? Especially if your location is key to success, your buyer will want to know the lease is secure for at least the next 3-5 years. In advance of the sale, negotiate a lease extension, if necessary. If you own the building, be prepared with supporting documentation to describe prospective lease arrangements. If your business is fully or partially conducted online, describe how your website and other accounts are owned and ready for transfer.
• Are operations easy to transfer? Be ready to discuss business and marketing plans, operations and employment policy manuals, and other materials that document the workings of your business. Do not release the documents, as the prospect may or may not be the buyer of your business but offer assurance that they will be transferred to the new owner following the closing of the sale.
• Will staff remain loyal to the business? Most buyers want to hear that one or a few top staff members with knowledge of operations and customers will remain with the business after the sale. Be prepared to discuss transferable employee contracts and non-compete agreements, if any, as further assurance.
• Will customers remain loyal to the business? If customer loyalty is key to business success, get client lists in order before the sale. Buyers feel more assured if they see there are a large number of customers rather than a few, and that many have long-standing relationships with the business – the largest with contracts or agreements that will transfer with business ownership. Also, expect questions about whether customers are loyal to the business or to you, personally, in which case a longer transition period may offer assurance that there is time for relationship handoff.
• Are you willing to stay with the business during a post-sale period? Willingness to remain with the business during a post-sale period, usually 3-12 months, gives the buyer confidence and supports a higher selling price. Unless the business is in strong condition and very easy to transfer to a new owner, the seller’s desire for a rapid departure can lead to doubts and lower selling prices, especially if the seller also requests all-cash payoff at closing.

Are There Business Risks to Be Aware Of?

Anticipate this question well in advance of the sale and take preemptive action to reduce or eliminate risks before presenting your business for sale. To a buyer, the big red flags to avoid include:

• Low or declining sales and earnings.
• No key staff member who will stay on after the sale.
• Lack of documents detailing how the business runs.
• Unprofessional financial records.
• Dependency on only a few clients, or clients who are loyal to the owner rather than the business and its offerings.
• A declining industry or market area.
• Lack of documents detailing how the business runs.
• A problematic, nontransferable, or soon-to-expire building lease.

If risks are few, you can discuss any turnaround efforts you have already outlined and present them as growth opportunities. Better, though, to overcome as many weaknesses in advance as possible, keeping areas of concerns to only a few, if any.

Are You Open to Payment Terms?

Payment terms can make a positive difference in your asking price and in the final negotiated price a buyer pays. Sellers willing to take a good portion of the sale price at closing and the remainder through a seller-financed loan attract a larger buyer pool. Also, seller financing contributes to higher asking prices and, after buyer negotiations, higher asking-to-closing prices than sales requiring all cash at closing.

Though you will negotiate and finalize pricing and payment terms as you structure and finalize the sale prior to closing, early on be ready to address this key question.

Buyers will pose a range of questions during the business sale process, and your readiness to address these queries will impact the success of the transaction. By anticipating and proactively responding to common buyer concerns, you enhance your chances of facilitating a smooth and successful business sale.