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BUYING A SMALL BUSINESS

5 Must-Ask Questions for Business Buyers

Like many business buyers, you likely have some boilerplate questions to ask business sellers, but you may be missing the most important ones.
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In today's business-for-sale marketplace, buyers are conditioned to ask sellers a standard set of questions about the company's financial performance and current value. Most sellers know the routine and are ready to answer these questions in a way that presents their company in the best possible light. Like anybody selling anything, they emphasize the positives and minimize the negatives.

Boilerplate questions are convenient and helpful--but they aren't very effective at unearthing the insights buyers really need to make informed buying decisions. In some cases, a rosy financial history and promises of a turnkey operation obscure serious issues about the company's actual value or growth potential.

Buyers need to get a layer deeper and ask pointed questions to gain a clear picture of potential business investments. Whether you're working with a broker or going it alone, here are five must-ask questions to take with you when you enter the business-for-sale marketplace.

1.  When did the seller make the decision to sell the company?

Most buyers ask sellers why they are exiting their companies. It's a perfectly natural question to ask, but sellers are prepared for it and are usually honest in saying that it's time to retire or explore other business opportunities.

But the question buyers don't ask is when did the seller decide to put the company on the market (i.e., "Why now?") From a buyer's perspective, discovering the timing of the sale can be even more important than learning the seller's motivation.

The decision to list a healthy company doesn't happen overnight. If the business is solid, the owner should be able to provide you with the multi-year plan he executed to prepare the company for sale. If the owner didn't have a plan and suddenly decided to sell the business, it may be for family or health reasons that can arise quickly. However, if that is not the case, it could be a sign that the company is in financial trouble or that significant market threats are looming on the horizon. Dig deep with the seller to make sure you really explore what might be behind his or her decision about when to sell.

2. How did the seller determine the asking price? What valuation method was employed?

Buyers usually don't care about the seller's valuation method. Since you will perform your own, independent valuation process, the seller's valuation process will have very little to do with your estimation of the company's worth.

But by understanding the method the seller used to set the asking price, you gain information that will be important during the negotiation stage. Although sellers frequently use either an asset-based or income capitalization method for the sake of simplicity, multiplier valuation methods are a more accurate gauge of small business value.

If the seller used multiplier valuation to determine the asking price, then negotiations will be easier because you're both on the same page. If not, you'll have to make a case why the multiplier valuation method is more accurate than the method the seller used to price the company.

3. What are the seller's desired outcomes?

Buyers assume that sellers want to walk away from the sale with as much cash as possible, but money isn't necessarily the seller's primary concern. In addition to a fair sales price, sellers may have a variety of non-cash outcomes they hope to achieve in the deal.

For example, most sellers are interested in making sure that their businesses will continue to be a healthy workplace for their employees. Many also have some opinion about their desire to remain with a company during the transition to a new owner. Depending on how the seller approaches this topic and how his or her desires fit with yours, it may lead to a stronger or weaker ability to get a deal done. Many sellers are interested in ensuring that the company reaches the next stage of growth, even if they are no longer at the helm. Finally, the seller's willingness to accept part of the purchase price over time, known as seller-financing, can also help you determine your willingness to get a deal done.

Never assume that a seller is motivated exclusively by financial outcomes. Instead, ask sellers what they hope to achieve from the sale and use the information you uncover as a negotiating tool.

4. How would the seller grow the company?

The current owner is almost always in the best position to gauge the company's future potential. But unfortunately, sellers have a personal stake in convincing buyers that the business is poised to experience meaningful growth in the months and years ahead.

One of the ways to get a more honest assessment out of the seller is to ask him for specific strategies that he would use to grow the business. As a follow-up, ask about the obstacles that prohibited him from executing those strategies during his ownership tenure, and what it would take, specifically, to put those plans in place.

With the right approach, it's possible to use this question to create a collaborative tone in your relationship with the seller and gain important insights about how to expand the company's footprint going forward. Alternatively, if all of the seller's ideas for growth seem half-baked, or worse, he has tried them and failed, it may cause you to reassess the potential for success with their business.

5. Will the seller agree to a non-compete clause?

As a business buyer, your nightmare scenario is that the current owner is selling the company to launch a new business and take all of the business's existing customers with him. If that happens, the value you attributed to the customer base will evaporate and you will be left to build a new business from scratch.

To mitigate risk and uncover the seller's true motives, ask whether the seller is willing to sign a non-compete clause. In most cases, the seller's response to this question will give an immediate indication of the strength of the company's customer base, and give you an indication if this is a deal you're likely to see through to its conclusion.

Caveat emptor is the mantra in today's business-for-sale marketplace. Although there are plenty of strong, healthy businesses out there for the right buyers, there are also some lemons. By far, the best way to protect your investment and achieve your ownership goals is to expand the list of questions you ask sellers to discover the company's true condition and future potential.

IMAGE: Getty
Last updated: Jan 24, 2013

MIKE HANDELSMAN | BizBuySell.com

Mike Handelsman is group general manager for BizBuySell.com and BizQuest.com, the Internet's largest and most heavily trafficked business-for-sale marketplaces.




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