What Is The Buyer Worried About?
By Richard Parker, President of Diomo Corporation (www.diomo.com). Richard is the author of several books and has over 100 published articles to his credit on buying and selling businesses. He is one of the country’s most successful mid-market mergers and acquisitions professionals.
I have been involved in hundreds of small business transactions and have found that there are eight common concerns that almost every prospective buyer brings with them. Some of these are out of your hands, but one thing is certain: if you can satisfy these eight, you’re going to sell them your business.
Is The Business Right For Me?
This is probably the only one of the eight that you cannot influence greatly. That is something the buyer must decide however; you can clearly assist them in reaching their decision either way. You must decide before you bring the business to market what the ideal buyer profile will be. This is not just someone who has a bag of cash. Even if they do, if they determine the business is not suited to them, there’s no deal. If you have a good idea of the skill set the new owner should possess then you should remain committed to your convictions and let any prospects know when they first contact you. If they don’t possess the key skills to operate the business, you’ll avoid wasting a lot of time meeting with the wrong prospects. Your broker will likely be conducting the same skill pre qualification as they too do not wish to waste time.
Similarly, don’t ever-engineer the criteria or allow your ego to stand in the way. Unless there are specific professional licenses required to operate the business, most often solid business skills, with perhaps a specialty in one area (i.e. sales, marketing, operations, product design, etc.) will be the dominant skill necessary to be successful.
Are The Numbers Provable?
One of the most frequent comments I get from buyer clients is that they have seen too many businesses where the seller cannot prove the numbers. So your strategy here is simple: If you cannot prove it, they won’t pay for it, so only represent what you can back up – end of story!
If you have unreported income in the business, don’t expect to get paid for it. You already got the benefit from the tax department.
Provide buyers with detailed proof to validate the financials you’ve represented and you will have cleared a massive hurdle. Further, as we discuss in other articles on this website, if your books and records are in disarray, don’t put your business on the market. Take the time to organize them properly and you reap the benefits, without question.
Is It Priced Right?
While a smart buyer may be willing to pay s premium for a good business, nobody will overpay. Buyers need to be certain that the business can be sustained, they can service any debt, pay themselves a reasonable salary, and ideally, have enough left to grow the business. No matter how good your business may be, the price and terms must fit within the prescribed borders for this to be a good investment.
Can It Be Financed?
Cash sales of businesses are rare, and are usually accompanied by a major discount. Serious buyers understand they will have to put down a substantial deposit but everyone wants leverage. There are two possible options for financing: government backed programs such as the SBA loan program in the USA.
Alternatively, seller financing in most US markets is the norm and is something you need to come to grips with specifically because it is common. While there is always a risk, offering financing for part of the deal will not only drastically increase the buyer pool, it will generally allow you to get a better price and provide some assurance to the buyer that you too have “skin in the game”.
Most business buyers are first-timers and incorrectly assume that banks have their vaults open to lend them money to buy a business. It is simply not the case. However, a serious buyer knows and the inexperienced soon learn that they have to put their money down on a business.
What Does The Future Hold?
A business will be sold based upon past financials, but the decision to buy will be based upon the future potential of the business. While some buyers consider growth potential as their main criteria, at the very least the majority of buyers want to know that history will repeat itself. In other words, the business is sustainable, that there are no looming threats that could drastically alter the business or impact it negatively.
Presenting a realistic picture to the buyer about the future, and being open about possible challenges will go a long way in soothing their concerns. In today’s information age, chances are any potential hazards will be identified and so it is always best to inform them of these matters if they are material to the transaction. By the same token, you want to present the business in a fashion that demonstrates that all of the parts are in palce for them to takeover and continue to be successful after your departure.
Will Customers and Employees Remain
This is especially important in businesses that may have a limited number of active customers or where there is one or a couple of key employees. The last thing a buyer wants is to be out of business shortly after they get into business. Due to confidentiality, it may be difficult to provide them with the complete assurances they need but at the very least, you’ll want to have mechanisms in place to provide some reasonable protections for them.
In the case of key employees, the buyer should be able to meet them after all other conditions are satisfied and so too with any major customers. You may not be fully comfortable with this idea which is understandable but you may need to put yourself in the buyer’s position for a moment to understand.
After all, if you are going to be participating in the financing, you want them to be successful and more importantly, it’s simply the right thing for you to so.
If The Business Relies on Location, Will the Lease Be Assigned
Landlords can sometimes derail your sale. I have witnessed and experienced it personally. You would think that every landlord’d agenda is strictly to have their premises filled with timely paying tenants and to a large extent this is precisely the case. However; there are times when a landlord may want to alter the premises, or wants personal guarantees from a new owner, or may just be a pain when it comes to assigning the lease.
Before putting your business on the market, check your lease’s assignment language to see if there is a clause that reads that an assignment “will not be unreasonably withheld”. Also, you may want to consider meeting with the landlord to see if they will add some option terms to the lease but you must couple this with raising concerns about the sale. Conversely, if you have less than two years on your lease, and the business needs to be where it is, you will want to get a lease extension in my opinion.
Are there Any Hidden Problems?
Every business has secrets. Problems are common, even if you don’t perceive them as an “issue” a buyer may. These will be uncovered by any diligent buyer. The best strategy is to be upfront with prospects about these potential issues so you can deal with them early on. Usually a work-around can be figured out. If you wait too long, or try to hide them and they do surface 9and they will) you will have a very difficult time resolving them and will likely lose all of the credibility that you have established with the prospective buyer.
This comes back to what I believe it takes to get deals done: when the seller wants to sell and the buyer wants to buy, and the parties trust each other, it’s almost impossible to stop them from getting a deal done.
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Richard Parker
