Most buyers understand that investing in the right small business requires a thorough due diligence process. However, there's much more to evaluating a potential purchase beyond assessing the company's cash flow, sales trends and expenses. Short of digging up a crystal ball, a smart way to gauge the potential of a small business purchase is to evaluate whether or not the ownership succession process will be a smooth one.
Three Key Questions to Ask Business Owners Regarding the Transition Process:
During negotiations with the current business owner, you'll get a natural feel for how easy or collaborative they'll be to work with during the succession phase. Gut instinct aside, keep an eye out for a few tangible factors that foreshadow a seamless hand-off, such as:
- Is the owner willing to stay on board as an advisor (even temporarily) after the deal closes? This can set the tone for your succession process. With most transactions, sellers agree to stick around for a month post-sale to train their successor, answer specific questions and transition key accounts.
Seller financing also demonstrates a commitment to a successful transition, since the owner remains financially invested in the business. If a seller expresses intent to move on from the business as soon as the ink dries, that could leave you with a steeper learning curve during the first few months of ownership.
You'll also want to gauge the seller's willingness to sign a non-compete agreement. If their post-sale plans involve starting a similar business across town, that could jeopardize your ability to retain key customers and staff. Sellers willing to include seller financing as a part of the deal demonstrate
- Has the owner created (or is willing to set up) financial incentives that motivate retention? Veteran employees and upper management are valuable allies to have during the early days of running your new business. But has the previous owner given them a good reason to stay? Early in the deal-making process, find out if the seller has created (or is willing to set up) financial incentives that motivate retention.
For instance, some business owners establish long-term incentive plans, or bonus accounts that employees can draw from after a certain number of years. In other cases, these bonus amounts may be partially contingent on the company's performance over time, giving key employees' a vested interest in the business succeeding long after the original owner steps away.
- Is there a strategic plan for communicating the news to customers? A seller who has a game plan for letting customers know about the sale is another indicator of a painless transition of power. Ideally, they will be prepared to share the news personally with clients as soon as the deal is done to ensure that the announcement doesn't leak through a third party (like the media, a competitor or another customer).
At the same time, determine whether or not the seller is game to spend time bringing you up to speed on important clients' account histories, needs and challenges. The more context the seller provides, the easier it will be to earn customers' trust and sustain their loyalty.
When purchasing a small business, it's important to interview the owner carefully and conduct a thorough due diligence. It's also good to have options. With the economy in a stable holding pattern and more Baby Boomers prepping for retirement, there is plenty of supply for eager business buyers to choose from. According to BizBuySell, the number of U.S. small businesses listed for-sale during Q4 2016 rose 7.8 percent year-over-year. Yet, the more discerning you are as a buyer, the faster you'll hone in on the right match in a sea of for-sale listings.