What to Look For in a Seller: Transition
"A major concern for the buyer should be how is this business going to transition," Parker says. "Probably the single most important factor a buyer has to consider is how is this business going to operate with me as the new owner. And what looming threats are there?"
Some questions you should ask:
• When you first started the business, what were your top three goals for the business and did you accomplish these goals? How have these goals changed over the years?
• How long have you been preparing for the sale of your company? What was the catalyst?
• Do you have a transition plan in place?
• What do you plan on doing after the business is sold?
• How would customers, vendors and family members react to the sale of your company?
• How long are you available to assist with the business or training after the transaction?
Fekkes says it is important to find out if the owner has an updated business plan and under what conditions would it be made available for review. "My notion of being a successful business operator is that when you started the business you had a business plan that outlined what you wanted to accomplish and you constantly updated that plan according to changing circumstances," explains Fekkes, who also serves as a SCORE counselor. There is generally a six-week transition period for the seller to get the new buyer up to speed. Ideally you want to have handed over to you the business plan and the transition plan. "Having those two documents add value to the buyer. There is no way the seller can convey all of the necessary information about the business," he adds.
Dig Deeper: Are Your Customers Loyal to You or Your Business?
What to Look For in a Seller: Finance
How much will the seller finance? This is a question that needs to be addressed up front, says Parker. "Deals get done these days through seller financing." Over the last two years, many banks and finance companies are requiring that the seller give a certain percentage of financing to ensure that they have a vested interest in the business and to reduce the risk of the buyer's default on the bank note.
Other questions you should ask:
• What percentage of the purchase price would you be willing to finance?
• Are you willing to discuss creative deal structuring (e.g., earn out or employment/consulting agreement)?
When asked about seller financing during the first five minutes, Fekkes says his answer is generally something as follows: "The seller is willing to provide some component of owner financing based upon the T&C's of the deal, transaction price, and related industry experience of the buyer." He adds, "A seller should never negotiate owner financing without having a better understanding of the buyer and the terms of the transaction."
Overall, you should be prepared to know all of the drawbacks. Any time you spend evaluating a business to buy should involve considering the negatives at least as much as the positives, Parker says. If you know the problems ahead of time—slow deliveries from suppliers, ineffectual marketing campaigns, or poor relationships with industry regulators—you will know what needs fixing.
You need to do your homework before moving on to an offer, so be sure to get enough information in that initial face meeting to conduct further research. If you take away anything, adds Parker, it should be the answer to these four questions:
1) Do I like the business?
2) Can I see myself running it?
3) Do I like the seller?
4) Do I trust the seller?
The fist two answers will provide you some clarity about the next steps to take. "If you like and trust the seller, chances are you both will be able to work through any and all challenges that will arise," Parker explains. "If the seller believes that you can not only get the deal done, but also run the business successfully, they will go out of their way to make the deal happen."
Dig Deeper: How to Finance an Acquisition
