When it comes to selling your business, there’s a (seemingly) never-ending list of things to think about. There are documents to prepare, papers to sign, and numbers to analyze. It’s one of the biggest decisions of a business owner’s life, and yet you can’t discuss it with many people. Couple that with the fact that selling your business is usually a once-in-a-lifetime negotiation, and it can feel pretty overwhelming.
In this blog series, we’re discussing some important things business owners should know to make the selling process smoother. Below, we’ve listed some specific questions you should ask potential buyers to ensure you enter the sale with all the pertinent information on the table.
Recently, one of our clients sought our advice because he’d been approached by a company that wanted to buy his business. He was new to the process, and before they discussed a price or had an official meeting, the potential buyer asked him to sign a nondisclosure agreement. This is typical for most transactions, but he wanted to make sure it wouldn’t become a problem later. Once I assured him it wouldn’t, he asked about valuing the business—“How do I know how much my business is worth?”
Honestly, you could have 100 different analysts conduct valuations of your business, and you’d receive 100 different numbers. There’s no definitive way to assign value, so the questions you need to ask are: What am I willing to sell for? And, What is the buyer willing to pay?
If you’re eager to move on, you might be willing to sell for $8 million even though your business could be worth $10 million—and knowing this could make negotiations easier for you down the road. Whatever the case, it helps to know what you need and want from the sale so you can address those terms confidently.
Once you know what you want from the deal, here are some questions you’ll want to ask a potential buyer before you get knee-deep in a sale:
How did you determine the value and purchase price of the other businesses you acquired?
The company that approached my client was an experienced buyer, so they’d made similar purchases before. And while you can’t usually ask about previous purchase prices, you can ask how they arrived at that number, which will give you a better sense of how they might value your business.
How will my company’s brand awareness factor into the valuation?
Our client’s parents started his company, and they’d built significant name recognition over the years. Building that kind of reputation takes time and effort buyers can’t replicate, so it’s something that should be factored into the purchase price.
Would there be an earn-out agreement?
Some buyers will put a contingency in their offer—for example, they might offer $10 million with a $2 million stipulation that the owner has to stay on for two years and the business must meet certain goals by the end of that time period. In that case, the buyer would pay $8 million up front, and you’d receive the rest of the money after meeting the terms of their earn-out agreement.
What types of compensation are included in the sale package?
Some buyers offer stock in their company or other compensation as part of the purchase price.
Will this be an installment sale or paid in full?
Your buyer might propose a payment plan or a one-time purchase price. It could also be a combination of the two, and you’ll want to know so you can plan accordingly.
Would this be a stock sale or asset sale?
Knowing this will help you determine how you’ll be taxed on the sale of your business.
Do you expect me to stay on after the sale? If so, for how long?
It’s fairly typical for buyers to ask the business owner to stay on for some time after the sale to ensure a smooth transition. If that’s the case, this is something you’ll need to factor into your post-sale plan.
Will there be a noncompete clause? If so, how long are the terms?
Some buyers will request that you not enter the same industry after selling your business. In the case of our client, if his buyer asked him to sign a noncompete, he wouldn’t be able to enter the same industry again, at least for a certain amount of time.
What’s your timeline for completing the sale?
Some buyers are looking for a quick transition, while others want to take things slow. Which brings us to our next question…
Are you comfortable limiting the due diligence phase to 60 or 90 days?
As we mentioned in our first blog, some buyers will drag out the due diligence process simply to wear out the seller. You want to avoid this if possible, so it never hurts to request a specific timeframe.
Are you comfortable paying earnest money before we start the due diligence process?
This is a pretty common request, and the process is similar to when you sell or purchase a home. The earnest money is typically around 5 percent of the potential sale price, and it ensures you’re not wasting your time going through a lengthy sale process that could fall through.
Do you plan to rent the physical space after the sale?
Our client owned the commercial building where his business was located. His potential buyer was a state-wide company that had purchased several businesses already, and in their previous buyouts, they rented their commercial spaces. If they didn’t plan to rent from him post sale, he would need to think about finding a new tenant or selling the building.
Selling your business is a process most people only experience once, so it’s hard to know exactly what to expect. Asking questions like these will help you prepare for the road ahead and consider components of the sale that might make your life easier—or more difficult.
If you want additional direction and guidance about the selling process, talk with a professional. Like we discussed in the last blog, you’ll need a team of people to help you navigate the sale smoothly, and a financial advisor will be able to help you consider how certain aspects of the sale will impact other areas of your life. If you have questions or need a partner to help you manage your financial world, we’re here to help. You can learn more about our services for businesses here or click below to schedule a consultation.
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Pensacola, FL 32502
Phone: (850) 542-4803