Questions Every Business Owner Must Be Able To Answer When Selling Their Business
While attending one of my first International Business Brokers Association (IBBA) conferences, I had the good fortune of taking a class that was being presented by a business brokerage legend, Mr. Len Krick. I can’t remember the exact course, but I do remember a bit of wisdom that Len passed on to the members of the class, and that was we needed to prepare our Sellers to answer a number of basic questions that all Buyers will ask in one way 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.
- You also need to plan for what you will do once the business has sold and you have fulfilled all of your post sale commitments.
- How much money does it 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.
- 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.
- 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.
- Sellers will generally receive 10% or more for their business after you have accounted for the interest.
- 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.
- 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?
- We never guarantee that employees will stay with a business, but if you can show a 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 will make your business harder to sell.
- Landlords/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’ volume, you can expect a prospective Buyer to identify this as a “big deal”.
- 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. If you would be interested in speaking with one of our intermediaries regarding the sale of your business, please give us a call at 813-260-3127.
About Us: VR Business Brokers is the world’s largest and most experienced brokerage firm specializing in the sale of purchase of businesses. We go the extra mile every day to ensure that all parties are satisfied during the complex business sales process. We know that each and every business is unique, and that’s why we go through a meticulous process to find and unlock the true value of each business. More information is available at www.VRSouthShore.com.