David Tobin is the Founder and Managing Partner of TobinLeffa consultancy for M&A advice and exit planning.
When it comes time to sell your business, it’s imperative to put yourself in the buyer’s shoes if you want to anticipate the many questions they’re likely to ask. If you have good answers, you can maximize your selling price. Based on my experience helping 150 entrepreneurs with exit plans and M&A, below are nine common questions to prepare for.
1. Why do you want to sell?
A potential buyer will want to know your motives, your intentions and your vision for selling, so lay down the reasons in advance. Buyers sense if you’re tired or burnt out. If you’re undercapitalized, buyers will see that in your financials. If you get energized to be part of a larger company, buyers will feel it. Be transparent about your reasons for selling your business.
2. What is so special about your company that I can’t find anywhere else or build it myself?
Most owners will claim they are a “different type” of business, obsessed with customer service, have proprietary technology, have a “family like” culture, etc. But what’s really special about them? And what’s really unique about yours?
There are endless reasons why buyers pay top dollar for a business. To maximize your payout day, you need to show buyers what’s extraordinary about your business. For example, have you developed a business formula that consistently generates 25% profit margins? Are you a recognized industry leader for specific products or capabilities? Do you have intellectual property? Formulate your vision and unique value proposition.
3. How dependent is the company on you?
If your business is too dependent on you personally, there will be more commitments to the deal and you will need to stay involved longer to ensure the business is transferred and maintained.
Most business owners know the importance of delegation and developing processes to run the business. Involve others as much as possible. Quantify and document when others generate leads, help win new customers and lead accounts. Step away from the day-to-day leadership tasks. Show that the business can thrive without you.
4. How good are your people?
Buyers know you can’t do great work without great people, so they’ll pay special attention to the caliber of your senior staff when assessing your company. Are your senior people recognized as thought leaders in the markets you serve? Do major clients count on them? Can they bring in the big bucks?
5. Will our cultures and values be compatible?
There are two aspects of your corporate culture that buyers will examine during preliminary discussions: the nature of your internal culture and whether your culture and values are compatible with theirs.
Culture is a means to an end, which is to make a profit, and like any other aspect of the business, can and should be measured. Do you have a lower than average industry turnover? What do employee surveys reveal? What does a visitor feel when he walks into your office? What is the energy flow?
6. Is there customer concentration risk?
Any business owner with that 800-pound gorilla customer is desperately trying to minimize the percentage of sales that’s taken from that account, but that’s easier said than done. No one is turning away customers from their biggest customer, so the only way to reduce dependency is to get more customers from other accounts. If you serve multiple business units with different decision makers within the gorilla business, the risk can be mitigated and your M&A advisor can promote that fact. Ideally, no customer should account for more than 20% of sales.
7. How do you generate new business?
If you’ve really built your business to be ready to sell, you should be able to demonstrate to buyers that you have a proven process to keep your pipeline full. Document your techniques and the achieved results of your sales/marketing efforts. Use this as another chance to validate that new business is happening without you.
8. How can we grow the business?
The reason sophisticated buyers pay high amounts is because they see how the acquired company can grow and increase the value of their business. Develop and document strategic growth plans. Help potential buyers and investors see growth opportunities, both in terms of turnover and result.
9. How can I be sure that the business will continue to thrive under the new owner?
Buyers want to know that your business is sustainable and transferable. Sustainable business starts with sustainable leadership, so speak with conviction if you want to stay engaged and brag about how great your people are. Reiterate the power of customer relationships, sources of recurring revenue, and the systems you’ve put in place to generate new customers.
Companies built to sell are those with proven, sustainable business models. Big money companies are those with unique value propositions that have growth potential. Have great answers to questions buyers typically ask and you’ll be able to maximize your payout day.