This article was originally posted on 20th of April 2014.
When you’re selling your business one thing you can be sure of is you will be asked lots of questions. It may even feel like you’re under interrogation or worse still, sitting a high school exam. This can feel like the buyer is testing you. They are!
Before they write you a cheque they will want to grill you on all facets of your business and its operation.
The buyer needs to understand, in a very short space of time, what you have learnt over many, many years. This can make the process seem intimidating. Of course every buyer will be different, but here are the basic questions that you should be prepared to answer when you’re in the spotlight.
Looking for a handy checklist that will walk you through all that’s needed when preparing your business for sale? We’ve created one with all you need – and you can download it here
But first, here’s why you need to prepare
It is helpful to put yourself in the buyers shoes. To see things from their perspective. To imagine what’s going through their mind and why.
Think about buying a 2nd hand car from someone in their mid 30s. One question you can ask is why the owner is selling. The answer immediately alters your opinion of the car. For instance;
“I just need something bigger” – fairly neutral reaction
“It’s my Gran’s car and she’s uncomfortable driving in busy traffic these days” – you could think it has low mileage and has been regularly serviced. A great buy.
“It flipped on its roof last year, but it’s fully repaired” – you will now have doubts about wanting to own the car. It may have been fully repaired, but to what standard? Do you want to drive your kids around in it? What caused the accident? Is it a common occurrence with this vehicle?
Bizarre examples, but the point is the instant reactions we all have when given information. The gut reaction. The reaction which could jeopardise the sale.
That is why you need to be prepared, so let’s get going on the 8 common questions you’ll be asked when selling your business.
1. Why do you want to sell your business?
Be honest above all else, but also be positive with your answer.
A buyer wants to buy a business that has a great future. You and your broker’s presentation should be around this, and it can be tricky.
The most common reasons for sale are
the business has outgrown the owners skillset
the owner has a new enterprise they want to move onto
the struggles of the business are too stressful
Retirement and health issues are pretty self explanatory. Expect supplementary questions around your availability for handover or as a point of reference post sale.
If the business has grown to a size that you feel your skillset is no longer adequate, you need to explain this. They will want to know what skill limits have you reached that the new owner has to provide. Whether you have tried to recruit this skillset only to find a shortage in the market.
If you have a new enterprise you are moving into, you will have to share what it is. They will be assessing if it competes with the business being sold. Will you take customers away from the business being sold. The last thing they need is to buy a business whose customers walk out the door and follow you to a new enterprise. They need both clarification and reassurances that this will not happen.
If you are selling because the struggles of business are too stressful, this is perhaps the most important answer to be positive on. Just because you have found a situation stressful, the next owner may not. The key here is to explain what those stresses are.
Many people will be feeling this way after 3 years of Brexit uncertainty closely followed by a global pandemic. That is easy for anyone to relate to. You may have struggled with finding a reliable supplier in the past, but emphasise that you now have this. It could be you had a spate of staff leaving the business and a heavy demand on recruitment and training. But emphasise the stability of the staff you have now and their capabilities.
So prepare your answer to “Why do you want to sell, and sell now?” and give yourself the best chance of avoiding a gut reaction.
2. What does it cost your business to get a new customer?
CAC (Customer Acquisition Cost) is a recognised metric in business. It apportions business costs for sales and marketing etc to determine the cost to your business of acquiring each new customer.
The cost is just one aspect to the question. What they are also assessing is how quickly they can grow your business. Will the cashflow allow for rapid growth or would they need to take it more slowly.
Your answers, and whether you have this information, also demonstrates how ordered your business data is. It should lead the buyer to believe you have a predictable, economical and scaleable formula for finding and recruiting new customers. They can work with this, what they can’t work with is pure fluke or happenstance.
3. What is your market share?
Again, this question is about growth. They are trying to understand how big your potential market is and what part of it remains untapped for them. So understand the size of your market.
If yours is a local service business, they want to know what share you have of that local market. In manufacturing if you distribute to a worldwide client base, they want to know what share you have of the international market.
By answering this question, you are also confirming how much of the market they can target. You may even talk about your biggest competitors and their market share. To continue to grow your business, they need to encourage new customers, or entice them away from other companies.
If you don’t have hard data, and you are providing an educated guess or assumption, be clear on this too.
4. Who are the key members of your team?
The buyer for your business, more often than not, will see your business as an investment, not a job. They will see themselves in a guiding, management role. So they will need to know who the key personnel are that keep the business running.
Predictably, this usually includes your management team. Additionally, it might be a talented sales person or a gifted marketeer.
They need to know that they can work with these people, but they are also examining what makes the business tick. These key personnel are the heartbeat of your business and need to be looked after during the sale transition. It is also important to demonstrate that you are not the heartbeat. That the business can survive when you are no longer part of it.
5. What do your customers look like?
Strategic buyers are searching for any possible synergies between their sales and yours. If they are buying your business as an addition to their own business, they will want to cross sell.
The more you know about your customers and their demographics, the better the buyer will be able to assess the strategic fit. Many businesses will create a avatar to help them.
If you have B2B customers be prepared to answer where your contacts come from, e.g. training manager, sales director, finance director.
The better the fit the more they could pay.
6. How do you make what you sell?
Whether it’s a physical product or a service, a buyer is assessing how unique it is. They are trying to understand how unique your formula for creating your product or service actually is.
Potential buyers want to know if you have any proprietary systems that would be hard for a competitor to replicate. They may also ask if you have claimed your R&D tax credits for these innovations.
They will also want to know if the creation of your product or service is dependent on any one person. Think engineering. If the design process for new products sits with one person, the business is at risk when that person leaves. This makes the business a riskier investment which will be reflected in the price offered or the structure of the deal.
7. Is there anything unique about your product or service?
A buyer is trying to understand what kind of protection your product or service has from competitors who may decide to compete with you in the future. Also they wish to know what protection you have in place against the competition? Patents, Trademarks, Copyright or other means of security.
8. Can you describe your back-office setup?
This is all about economies of scale, particularly for strategic buyers with existing companies. They will want to understand if they can achieve economies of scale? So they will want to know about your bookkeeping and billing software, how customers pay and how you pay suppliers.
Possibilities to centralise or streamline often sit within the accounts, HR, training and other centralised departments, so prepare to talk about them.
This list, of course, is not exhaustive. It is just 8 of the questions you’ll be asked when selling your business, but it’s a good start when you are preparing to represent your company to potential buyers. Having answers at your fingertips will increase a buyers confidence in you. This also supports the value of your business.
We have produced a guide which covers some of the issues highlighted in this article, to add value to your business or improve its ability to sell. Request your copy below.