Selling your business can be a lot like dating. In the beginning, you want to present an attractive version of yourself (that is, your business) to find the best potential partner (i.e., buyer). When someone is interested, you vet them to see if things can work out amicably between the two of you. You have to know what you want, but also be willing to compromise.
It’s a delicate dance, but when you set your expectations early and enter the process with the right information in your toolbelt, both you and the buyer can come out as winners.
In our previous blogs, we talked about how to know if you’re ready to sell your business and how to lay the groundwork for a successful sale. In this blog, we’ll discuss some things you should consider once you meet a potential buyer.
At some point, your buyer will give you an offer or letter of intent. This isn’t a guarantee they will buy your business, but it’s a sign that things are getting serious, almost like getting engaged. Here are some things to consider before you move forward with the due diligence process:
1. Is Your Buyer a Competitor?
During the due diligence process, you’ll be required to send your potential buyer a slew of sensitive information about your business—loan agreements, financial records, marketing plans, your client list—all of which could cause serious damage in the hands of a competitor. That doesn’t mean you can’t sell your business to a competitor, but you need to take precautions to ensure they’re a serious contender—one of which is determining their financial viability.
2. Does the Buyer Have the Financial Capability to Complete the Sale?
We’ve discussed the ways potential buyers will vet you, and you have every right to do the same to them. While they gauge your business’s viability in the market, you should evaluate their financial ability to purchase it.
As they’re interviewing you, ask your own questions. Request their financial statements and review them. If they mention an investor who’s aiding in the purchase, ask for their financial information. If they offer $1 million but they only have $100,000 in cash, ask if they expect you to owner finance. (That’s not an ideal situation for most sellers, because if the business fails under the new buyer’s management and they can’t pay you, you could end up taking ownership of the business again—but in a less favorable state than when you sold it.)
The idea is to eliminate any “tire kickers” who can’t complete the sale. Selling your business is an intense process, and the last thing you need is someone getting your hopes up and leading you down a road to disappointment.
During this process, your buyer will likely ask you to sign a nondisclosure agreement. It’s a standard request, and it’s also one you should ask of your buyer before you enter the due diligence process—this will ensure they don’t share your information with anyone, which is critical if the sale falls through.
If you’ve determined you have a qualified buyer, here are some other questions you should ask them. Once you’ve completed these preliminaries, you’ll move on to the infamous due diligence phase.
Your buyer will request a list (usually an extensive one) of documents and information for them to review before the sale is finalized. Remember, you’ll still be running a business at this point, so it can take some time to pull everything together. If you want to get ahead of the process, here are some items your potential buyer will likely ask for:
Client List
Employee List & Agreements
Contracts
Organization Chart
Insurance Policies
Patents
Trademarks
Outstanding Loan Agreements
Statement of Seller’s Discretionary Earnings
Financial Ratios & Trends
Building or Office Lease (if applicable)
Photos of Business (if applicable)
Equipment Lease (if applicable)
Maintenance Agreement (if applicable)
Inventory List
Marketing Plan
Samples of Marketing Materials
This list is far from comprehensive, and the process can drag on for months while the buyer digests the information. Not only will it take time for you to gather and present the necessary information, but the buyer might ask for clarification about certain points, request additional items, or disagree with how you calculated something, which can mean reevaluating or explaining how you arrived at a certain projection. This tedious task is an inevitable part of the sale process, so it helps to know what you’re getting into and prepare accordingly. Have your documents organized and be ready to explain anything as necessary.
If you’re looking for guidance about the sale process, we’d love to help! We specialize in helping business owners optimize their finances, and we have experience helping clients transition from business ownership to retirement (or on to other exciting ventures!). Just click below to schedule a consultation.
125 W. Romana Street, Suite 720
Pensacola, FL 32502
Phone: (850) 542-4803