You may be eager to sell your business, but are you prepared for the numerous questions a potential purchaser will have before they start looking inside every corner of the business?
Many of these questions will be objective in nature, such as:
- When does your lease expire and what are the terms?
- Do you have signed, up-to-date contracts with your customers and employees?
- Are your products and processes protected by patent or trademark?
- What kind of technology do you use and are your software licenses up to date?
- What are the loan covenants on your credit agreements?
- Do you have any litigation pending?
There will also be more subjective areas a purchaser will be interested in, including figuring out just how integral you are to the success of your business. After all, one of the biggest value drivers and areas of concern for potential purchasers is the extent to which the target business is dependent on the owner and the risk associated with the transferability of the business to new owners.
An experienced purchaser will be creative in assessing this issue before providing a letter of intent and conducting detailed due diligence. Here are 4 possible traps for business owners to avoid when being courted by a potential purchaser.
Trap #1: Last-minute meeting changes
An acquirer may ask to make a last-minute change to your meeting time. How you respond to this request may provide a clue as to how involved you are personally in serving customers. If you can't accommodate the change request, the acquirer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there.
Trap #2: Checking for consistency in your business vision
An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, they may ask the same question of your employees and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.
Trap #3: Asking your customers why they do business with you
A potential purchaser may ask your pre-selected customers "Why they do business with you and your company?" If your customers answer by describing the benefits of your product, service or company in general, that can be a sign of a valuable and transferable business. If they respond by explaining how much they like you personally, that can be indicative of a business that is too dependent on its owner.
Trap #4: Mystery shopping
Acquirers will conduct initial research before expressing an interest in buying your business. They may pose as a customer, visit your website, or come into your company to understand what it feels like to be one of your customers. If they see you personally as the key to wooing new customers, they will be concerned that business could dry up when you leave. Make sure the experience your company offers a stranger is consistent and try to avoid being personally involved in finding or serving brand new customers.
You may not be expecting an acquirer any time soon, but it is never too early to be prepared to deal with the traps a potential purchaser will set to assess owner dependence. Contact us at www.vspltd.ca for assistance with your succession and continuation planning.