Four Traps to Avoid when Dealing with a Buyer

You may be eager to sell your business, and pleased to have a buyer at your doorstep, but what’s it like when they start looking inside every inch of your business?

Most professional buyers willing to acquirer your business will have a checklist of questions – both objective and subjective – which they need answering before getting serious about buying your company.

Examples of objective questions include:

  • When does your lease expire and what are the terms?
  • Do you have consistent, signed, up-to-date contracts with your customers and employees?
  • Are your ideas, products and processes protected by patent or trademark?
  • What kind of technology do you use, and are your software licenses up to date?
  • What are the loan covenants on your credit agreements?
  • How are your receivables? Do you have any late payers or deadbeat customers?
  • Does your business require a license to operate, and if so, is your paperwork in order?
  • Do you have any litigation pending?

Then they’ll try to get a subjective sense of your business, including figuring out just how integral you are personally to the success of your business. And that requires some investigative work as well as some tricks of the trade. For example:

Trick #1: Making last-minute changes

By asking to make a last-minute change to your meeting time, an acquirer gets clues as to how involved you are personally in serving customers. If you can’t accommodate the change request, the acquirer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there. Remember, if your business can’t run without you then you have a classical pyramid organization, which reduces the attractiveness of your business.

Trick #2: Checking to see if your business is vision impaired

An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, he or she may ask the same question of your employees and key managers, if and when they’re allowed to do so. If your staff members offer inconsistent answers, the buyer may take it as a sign that the future of the business is in your head.

Trick #3: Asking your customers why they do business with you

A prospective buyer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and will therefore expect to hear good things. The customers may be asked a question like ‘Why do you do business with this company?’ The prospective buyer is trying to figure out where your customers’ loyalties lie. If your customers answer by describing the benefits of your product, service or company in general, that’s good. If they respond by explaining how much they like you personally, that’s not too good, as that translates into being indispensable.

Trick #4: Mystery shopping

The savvy buyer often conducts their first bit of research before you even know they are interested in buying your business. They may pose as a customer, visit your website, or come into your company to understand what it feels like to be one of your customers. However, bear in mind this is only likely to happen if a business intermediary is not involved, as typically a prospective buyer would have to sign a non-disclosure to learn the name of the business.

Make sure the experience your company offers a stranger is tight and consistent, and try to avoid being personally involved in finding or serving new name customers. If a prospective buyer sees that you are personally the key to wooing new customers, they’ll be concerned that business will dry up when you leave.

You may not be expecting an inquiry any time soon, but it’s never too early to ask yourself the questions a prospective buyer would be asking you – and your employees and your customers – if they were thinking of buying your business.

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