One of the most intimidating aspects of selling your business can be facing the barrage of questions during the various management presentations you’ll be doing for potential acquirers. While each discussion will be unique, you’ll want to pay special attention to the formulation of well thought out answers to the following:
1. Why do you want to sell your business?
This can be a difficult question to answer well, because if your business truly does have a bright future—and you want the buyer to believe that’s the case—the obvious question is: “Why do you want to sell it, and do you want to sell it now?”
2. What is your cost per new customer acquired?
The potential acquirer wants to find out if you have a predictable, economical and scalable formula for finding new customers.
3. What is your market penetration rate?
The acquirer, with an eye to future growth, is trying to understand how big the potential market is for your product or service and what more can be done to expand its reach.
4. Who are the critical members of your team?
The acquirer wants to understand the breadth and depth of your team and determine specifically which members need to be motivated and retained post-purchase.
5. Who buys what you sell?
Strategic buyers will be searching for any possible synergies between what you sell and what they sell. The more you know about your customer demographics, the better the buyer will be able to assess the strategic fit. If your customers are other businesses, a buyer will want to know what functional role (e.g., training manager, VP of sales and marketing) buys your product or service.
6. How do you make what you sell?
This question is asked in an effort to size up the uniqueness of your formula for creating your product or service. Potential buyers want to know if you have any proprietary systems or processes that would be hard for a competitor to replicate. For various reasons they will also want to understand if the creation of your product or service is dependent on any one person.
7. What makes your product truly unique?
A buyer is trying to understand how big the moat is around your business and what kind of protection it offers from competitors who may decide to compete with you in the future. What have you done to position yourself ahead of the competition?
8. Can you describe your back-office setup?
Most buyers will try to understand how easily they can integrate your back office into their operation. They’ll want to know what bookkeeping and billing software you use, how customers pay, and how you pay suppliers.
Of course this is not an exhaustive list, but answering these questions well before getting into a discussion will allow you to stand on a solid foundation when preparing to represent your company to your potential buyers.
You should also take the time to gather the facts and figures related to simple, objective questions, which will be on most professional acquirers’ basic checklists. Make sure you can answer the following:
• Do you have consistent, signed, up-to-date contracts with your customers and employees?
• Are your ideas, products and processes protected by patent or trademark?
• What kind of technology do you use, and are your software licenses up-to-date?
• What are the loan covenants on your credit agreements?
• How are your receivables? Do you have any late payers or deadbeat customers?
• Does your business require a license to operate, and if so, is your paperwork in order?
• Do you have any litigation pending?
In addition to gathering the facts and figures related to these objective questions, acquirers will also try to get a subjective sense of your business. In particular, they will try to determine just how integral you are personally to the success of your business.
Subjectively assessing how dependent the business is on you requires the buyer to do some investigative work. It’s more art than science and often requires a potential buyer to use a number of tricks of the trade, such as:
Trick #1: Juggling calendars
By asking to make a last-minute change to your meeting time, an acquirer gets clues as to how involved you are personally in serving customers.
If you can’t accommodate the change request, the acquirer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there.
Trick #2: Cross-checking company vision
An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, he or she may ask the same question of your employees and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business rests solely in your head.
Trick #3: Ascertain customer loyalties
A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and, therefore, will expect to hear good things. The customers may be asked a question like ‘Why do you do business with these guys?’ The acquirer is trying to figure out where your customers’ loyalties lie. If your customers answer by describing the benefits of your product, service or company in general, that’s good. If they respond by explaining how much they like you personally, that’s bad.
Trick #4: Mystery shopping
Acquirers often conduct their first bit of research before you even know they are interested in buying your business. They may pose as a customer, visit your website, or come into your company to understand what it feels like to be one of your customers.
In summary, make sure the experience your company offers a stranger is tight and consistent and try to ensure that your team isn’t overly dependent on you in finding or serving brand-new customers. If any potential acquirers see you personally as the key to wooing new customers, they’ll be concerned business will dry up when you leave.