by Dave Driscoll
Buying a business is probably the most consequential purchase you can make in life. Not taking the time to thoroughly evaluate whether you and the business are suited for each other can result in a bad decision that is financially and emotionally disastrous for you and your family.
When investigating buying a business after execution of a Confidentiality Agreement, it is important to understand the inner workings of the business and realistically qualify interest early in the process. Prior to presenting a Letter of Intent (LOI), a prospective buyer should have a conversation with the seller to ask questions about the business.
First, I recommend determining the seller’s role and motivation by asking the following:
- Why did you get into this business in the first place?
- What still excites you about it?
- What is your day-to-day role in the business?
- What would your ideal transition look like? What do you want to do post-sale?
- What are your expectations of a buyer?
- What problem does your company solve for your customers?
- Why do your customers buy from you rather than your competitors?
The answers allow the buyer to discern the seller’s true motivation, establish chemistry with the seller, and get the initial “feel of the business.”
The next series of questions clarify how the business works.
- Would you walk me through the entire process from sales and sourcing to distribution and serving the end customer?
- Does the business have a comprehensive operations manual?
- Beyond the owner, what is the leadership structure and their duties within the company? (This should be based on job titles, not actual employee names.)
- How long have your employees been with you on average and why do they stay?
- What types of external and internal problems arise in your company regarding production, service, employees, and customers?
- Who deals with those problems and how?
- At what percentage of capacity is the business currently operating?
- What capital expenditures should be made in this business annually?
- What opportunities do you foresee in this market through the next three, five, or 10 years?
The questions above focus on understanding the basics and establishing trust and chemistry between the buyer and seller. After that has been accomplished, another series of questions zero in on providing a roadmap to promote success and avert disappointments:
- What mistakes have you made and how can I avoid repeating them?
- Are there industry associations and resources for advice and counsel on trends and best practices?
- Are any customer relationships managed by you personally?
- How dependent is future success on transferring and maintaining those relationships?
- How likely are those relationships to continue after you are out of the picture?
- Does the company have intellectual property? If so, how is that protected?
- Are logos and business names trademarked? Do they convey with the business?
- What marketing and promotional materials support sales?
- If relevant, are the business’s inventions patented?
The seller should present five years of organized financial statements. When reviewing the financials, the buyer should ask detailed questions about:
- the story the Profit & Loss statement tells about the business operations
- the credibility of the source of the numbers
- historical and current performance
Establishing trust and respect between buyer and seller early in the process is crucial. Both parties must recognize that this pre-LOI conversation is the foundation for determining the tone of any future negotiations.
Asking thoughtful, detailed questions will help determine quickly whether this business is a good fit for the buyer, while also gaining the information needed to craft an LOI that defines the “essence of the deal.”
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.