Buying a business is a major decision for many people. It requires a lot of research, it requires a financial investment, and if you were working a W-2 job previously, it requires stepping away from the comforts of corporate America to pursue your own endeavor. Because of all of this, buyers are going to ask specific, pointed questions so that they can make a sound decision whether to buy a business or not. As a seller, you should be aware of the different types of questions you may be asked. A professional business broker can help you navigate this process. For now, we’ll share some of the more prevalent questions a buyer will ask a seller.
Question #1 – If this business is so good, why are you selling it?
This question is rooted in skepticism. Most people assume that if something is good you’d keep it! We all know that even good things come to an end, but helping a buyer understand the real reasoning behind the exit is important.
Question #2 – How much money does it make?
Obvious right? If you are going to buy a business, you want to know how much revenue it generates. Most Buyers need to receive THREE things from the business acquisition:
- Sufficient cash flow to service debt incurred in buying the business
- Enough left over to support themselves & their family
- A decent cash-on-cash return
Question #3 – What’s the upside potential if I buy it?
This question has room for interpretation. Buyers might be solely looking at revenue, and whether or not it’s consistent throughout the year. Others may be more interested in growth potential. Can they purchase more equipment to scale quicker? Could the addition of a great salesperson increase closed deals?
Question #4 – Where did you get that price!?
Pricing a business is an interesting thing, because there are a lot of differing opinions and procedures used to arrive at a price. A buyer is much more likely to pursue your business if they feel confident in your price. A solid price is also more difficult to argue against. As a seller it behooves you to work with a broker to compute a Broker’s Opinion of Value.
Question #5 – Will you (the seller) carry a note?
While there are a few different ways a buyer can finance a business acquisition, seller financing is actually quite common. A seller note is, in its simplest form, financing provided by the business owner/seller. The seller requires a portion of the purchase price in cash, but is willing to finance the remaining % at a specific rate and duration. While never a seller requirement, it is something sellers should consider offering on a case-by-case basis, and at their sole discretion.
Question #6 – Are there trained employees who will stay with the business?
So much of the success of a business comes from the people/talent working within the organization. They are the eyes/ears and hands/feet that conduct the day-to-day operations, sales, and service, delivering a final product or service to the end consumer. When a buyer buys a business, much of the value lies in the trained employees. In many cases the departure of key employees would negatively affect the business’ performance…or at least cause delays and/or short-term issues. As a seller, be mindful of this and do your best to communicate how this will work.
Question #7 – What is the condition of the lease?
Outside of remote (no location needed) businesses, most have some sort of brick-and-mortar facility. If it’s not owned by the business owner, the business location is being rented via a landlord. Every landlord has different rent pricing and terms, and each handles transfer of ownership differently. As a business owner, it’ll be important to understand your lease terms and how it might change in the event of a change of ownership.
Miscellaneous Questions
Question #8 – What is the condition of the franchise agreement?
If/when the business being sold is a franchise, that brings with it a lot of additional questions. Most franchisors will need to interview a new owner to ensure it’s a fit for their organization. In addition, there are typically franchise transfer fees, terms around royalties and advertising/marketing cost, and in some cases periodic business improvements that must be made at certain intervals. A buyer looking at a franchise business is going to want/need these details, so sellers should be prepared to share.
Question #9 – Does the business have a vendor and/or customer concentration issue?
Quite simply, some businesses drive revenue from a small pool of customers, or they rely on products/goods from a small pool of vendors. While this can work really well if the relationship is strong and pricing is fair, the flipside is that you risk having “all of your eggs in a single basket.” What happens if you lose 2 customers out of a pool of 5, driving 70% of your revenue? If the business generates $1M per year, a customer concentration of 70% is $700K. If that was made up of 5 customers and you lost 2 (40%), that’s a revenue drop of 28% of total revenue. Not good! As a seller, if this is something your business has, be prepared to discuss with a potential buyer.
If you are a business owner considering selling your business, please reach out to Justin Turner for a free consultation. He’ll take time to learn more about your business and reasons for selling, & share his background and an overview of the sales process.