Questions Acquirers Always Ask
When pursuing the sale of your company, it is important to be prepared. Being prepared not only means getting your books and records organized and preparing a quality descriptive executive summary of your company, it also involves educating yourself to properly address the common questions that will inevitably be asked by prospective acquirers.
Properly preparing for and addressing these questions will maximize an acquirer’s comfort level, reduce their perceived risk and increase valuation. Improperly addressing certain questions can change the tone of meetings, cause major concerns and even chase a buyer away.
The following are some of the most frequently asked questions posed by potential acquirers, along with suggestions on how best to address them. Never fabricate answers even if you perceive the truthful answers to be a “negative” toward selling your business. Assume that the truth will be revealed during due diligence and there is no way to recover from being caught in a lie or gross exaggeration. Proper presentation of these issues at the outset can minimize the negative impact on the buyer’s perceived value of your business.
Why are you selling your business?
Buyers are always concerned as to the actual motivating factors behind the sale of a business in order to verify that no “hidden agenda” exists. A prospective buyer would typically prefer a situation in which the seller is of retirement age and does not have any children working in the company that want to take it over. There are many valid reasons to sell a business at a young age (health, divorce, relocation, burnout); however, it is more challenging to provide the buyer with a comfort level as to the motivating factors, when they are not as obvious. You should be comfortable and confident when articulating your reasons for wanting to sell.
What will happen when your customers realize that you sold the company?
Acquirers are fearful of the customer goodwill that resides in an owner – and the risk factor that it may evaporate or erode once the owner sells the business. Small and mid-market client relationships are often built on strong personal relationships. The acquirer must assess the ability and likelihood of transitioning ownership without alienating customers. To the extent that a reliance exists, it is key to educate a buyer that the business is not dependent on any one or two major customers. You must be prepared to address questions relating to sales concentration or percentage of sales by customer. In the event that there are a few customers representing a large percentage of the business, it is critical to let the buyer know that you will devote a significant amount of time to work together w following a sale in order to adequately transition these relationships. If appropriate, demonstrate that the primary reason for customer loyalty and longevity is due to the level of quality, service and/or pricing, and not merely because of your past relationship. Furthermore, it would be helpful if you can show that your employees have the primary contact with customers, or that there is a reason(s) that the customer is just as dependent on maintaining the business relationship with your firm. THERE WILL BE SIGNIFICANT FOCUS ON LARGE CUSTOMERS.
Who are the key employees and will they remain with the company?
A primary objective is to verify that there are sufficient people and processes in place to manage the firm after the departure of the current owner. A secondary objective can be seen in the re-phrased question: “Is all or part of the business dependent on any of the employees, and what happens if they leave?” Buyers have to be concerned that the company retains the personnel required to operate to historical standards after the sale. The departure of key elements of the business (i.e. operations manager, key salespeople, etc.) could be a major setback.
The other concern can be that a specific employee that controls a major account or that has unique technical knowledge can potentially hold the buyer hostage after the sale. The existence of non-compete/non-solicitation agreements helps address this concern. In the absence of such agreements, your answers must address the lack of dependence on the employees and the ability to replace key employees in the event they choose to leave.
Normally, your employees feel the greatest amount of insecurity at the prospect of a sale to a third party, and therefore it is important that the buyer be educated as to the ideal timing of the news coupled with your presentation of the long-term benefits provided by the new ownership. The acquirer must then provide the necessary assurances as to what to expect following the transaction.
Why has the business been increasing (or declining) in recent years?
Acquirers will always look for trends in the sales, gross margin and profitability of the business. Although there is no guarantee that the past predicts the future, it is a reasonable starting point to forecast (and value) the business for transactional purposes. Buyers will generally assume that these positive or negative trends will continue. In cases where there has been a downward trend, be prepared to identify the reasons for what took place in the past and why this trend may (or may not) turn around. If interim year-to-date sales and profits are increasing, be sure to highlight the story behind the numbers.
What do you project the revenue to be in the coming year?
Be prepared with sound projections based on reasonable assumptions. Be careful not to be too aggressive or unrealistic. This could lead experienced buyers to suggest that a portion of the purchase price be contingent on these projections materializing following the sale. It is always preferable to have an acquirer be positively surprised by interim results during the process. Also, be careful to distinguish forecastable growth from existing products and services to the “theoretical” growth from a new offering that has yet to be proven.
Is there growth potential and how do you suggest that I expand this company?
This is an important question when considering the viability of a purchase. Businesses are usually bought with the intent of growing them to higher levels of sales and profits. If buyers don’t believe they can expand the business, most will not be interested. As a seller, it is critical to present the most viable expansion opportunities for the business. Be careful not to overdo it, because the less viable expansion opportunities will tend to dilute the more likely methods. Two to four ideas listed in order of importance will suffice. A typical follow up question will be “why haven’t you pursued these expansion strategies?” It is perfectly acceptable for the seller to share the reasons at this stage, for example, you have been comfortable with the size of the company and expansion has not been a priority. Another acceptable reason is that you do not want to take the risk of making additional significant financial investment to expand the company. If that were a valid reason, it would make sense to be able to identify what opportunities exist for an acquirer that is capable and willing to commit the capital necessary to take the business to the next level.
What about your business keeps you up at night? Are there any known threats to the long term viability of your business?
Buyers are very concerned about the risk factors that can potentially cause the business to fail or face a material decline in revenue and earnings. Risk factors refer to those areas that a business faces that cast doubt on the future cash flow of the company. Even if they are not likely to happen, just the very fact that they can potentially occur can be a major deterrent to a buyer, particularly if an occurrence can have significant negative ramifications. Although each of these risks is unique, they all have one common trait – an ability to either reassure or cast doubt on the predictability of future cash flow. There are countless risk factors associated with market forces, competition, customer or vendor concentration and a myriad of other areas that can adversely affect revenues. All businesses are subject to risk factors. The key mitigating factor is how insulated companies are to being able to absorb the inevitable things that adversely impact a company. If one of these risk factors materialized, to what level will it impact the business and what can be done to lower the risk.
Other common questions include:
Who are your main competitors?
How does your company differ from your competitors?
What capital expenditures do you anticipate the company will require during the next few years?
What is the percentage breakdown of each of your five or ten largest customers?
Who are your primary vendors? Do you have established relationships with multiple vendors in each purchasing area?
What do you plan to do after the sale? How long are you willing to remain with the business following the sale and what role would you like to play?
The above questions are only a partial representation of those that you should anticipate and be prepared for when you sell your business. The next issue of Exit Strategy will focus on additional questions that you are likely to receive from prospective acquirers.