Questions Every Business Owner Must Face To Sell Their Business.

Q&A

Sellers need to be able to answer a number of basic questions that Buyers will ask in one form or another.  Here are some of those questions.

  • Why are you selling your business?
    • You need to be able to provide an honest reason for why you are selling. I find that the better question that buyers need ask is why am I buying this business?
  • How much money does the business make?
    • The top line, annual sales figure is important, but an even more important figure is the Seller’s Discretionary Earnings (SDE).
    • Another way to think of this is that a buyer is paying for the past financial performance of the business, but buys for the future performance.
    • The Buyer must be able to support their family, retire principle and interest on debt, and get a decent return on their down payment from the SDE generated by the business.
    • Remember it’s hard to get paid for what the buyer can’t measure. That is why business with a significant amount of cash sales typically sell for a lower multiple of SDE.
  • What is the upside potential for a new owner? Is there potential to scale/grow the business?
    • Tell the Buyer of the things you would have done differently if you would have had the time, money, energy, etc.
    • As a Buyer sometimes you get a better response if you ask the question this way: “If money was not an issue, what would you do to grow the business?”
  • Where in the heck did you get that price?
    • You need to be able to defend the price of your business, as Buyers have a lot of information at their disposal and can quickly weed through overpriced listings.
    • Keep in mind that the SDE must support a Buyer’s family, retire principle and interest on debt, and provide a return on their down payment. If the business is overpriced, it will not do these three things and most prospective Buyers will avoid your opportunity.
  • Would you consider serving as the bank and holding a Seller’s Note?
    • If a buyer cannot find a bank to provide financing, the chances of selling will be much greater if you will hold a seller’s note.
    • A Sellers who is willing to help finance the Buyer’s purchase of the business will generally receive more for their business.
    • By taking a portion of the sales price via installment payments, the Seller may enjoy a tax advantage versus receiving all of the proceeds in one lump sum.
    • Seller financing shows the Buyer that the Seller has confidence in the business and believes that the business can make the payments.
  • Do the assets go home with the Seller every night? Is the Seller the Business?
    • The better a company can function day-to-day without the owner, the more sellable it will be. An example of a business type where this is a potential problem is Salons. The customers are frequently tied to the Stylist. If the Stylist leaves so do their customers typically.
    • Take the time to establish and document procedures, job descriptions, create an employee handbook, etc.
  • Are there trained employees who may stay with the business?
    • You can never guarantee that employees will stay with a business, but what you can do is show the buyer that you have a core of key employees who have longevity with the company, this will go a long way in making them feel more comfortable with their decision to buy your business.
    • Do what you can to make it difficult for your employees to leave your business.
  • What is the condition of the lease?
    • Contrary to what many business owners believe, having a lease with less than three years remaining can make your business harder to sell. This is especially true if the location of your business is a key ingredient in its success.
    • Landlords can be difficult and therefore leases are one of the top reasons that deals fall apart.
  • Does the business have any vendor/supplier or customer concentration issues?
    • If any one vendor/supplier and/or customer accounts for more than 10% of the business, you can expect a prospective Buyer to identify this as a “big deal”. It should be noted that concentration issues while are real thing what constitutes concentration varies by circumstance.
    • At the end of the day, it all comes down to risk, and you need to do everything in your power to avoid such concentrations, as the loss of one of these vendors or customers could severely impact the business.

The better prepared you are to answer these, and other similar questions that Buyers may ask, the more likely it is that you will be able to sell your business.