Preparing to sell a business is a challenging feat. Plenty of details keep business owners busy for many weeks, if not months. However, business owners looking to sell their business should consider the buyer's perspective.
Potential buyers are focused on obtaining an investment with low risk and a high reward. In a nutshell, buyers look for solid cash flow and for the business to have growth potential.
Accurate and complete information is the only way to prove the business you’re selling meets all of the buyer’s criteria. Painting an overall positive picture of the business and its growth becomes the sole focus when looking at the transaction through the eyes of the buyer.
Typically, buyers will evaluate different factors before deciding on a purchase.
What does the buyer look for?
Your potential buyer has a huge decision to make when undertaking this new venture. Purchasing an existing business comes with many questions, and the seller should prepare beforehand.
So, what are some things a buyer is looking at? Here’s a quick view:
The why?
Will this business fit the buyer?
Timing of the listing
Preparation of information
Financial statements
Sales and profits information
The newest business valuation
Curb appeal
Financing options
Hidden complications
Anticipating some of these buyer concerns will place the business sale on the right footing. It will showcase a certain level of care and dedication by the seller and encourage potential buyers.
Let’s take a closer look at each of these.
The Why?
The first question buyers will ask is why you’re selling the business. The most common reasons are:
Retirement
Illness
Death
Boredom
Partnership issues
Overworked
Whatever the reason might be, honesty is the best policy. Of course, you don’t want to come right out and specify that the business is being sold due to low profitability since it is likely to impact the sale.
The good news is that downplaying that information won’t hurt in the long run - once the buyer goes through the financial documentation of the business, they will see the state of its profitability.
Is the Business a Good Fit?
The buyer will likely answer this question since they are the ones making the purchase. But that doesn’t mean the seller cannot help them.
As the seller, you should know the type of buyer you’re searching for. You know best what it takes to run the business - what knowledge and skills are necessary. The ideal buyer is not just someone who has the financial means to make the purchase but rather someone who can take the business to the next level.
When the right buyer reaches out, don’t hesitate to tell them your opinion - it might be just the push needed to close the sale with the right person.
Timing
Preparation is the key to finding a solid buyer. Taking the time to plan the sale of the business is more attractive to a prospective buyer since it boosts profiles and increases the customer base.
When a seller takes their time to set up the sale, it signifies to a future buyer that the seller isn’t hurrying through the sale because of financial issues. It gives them a sense of peace and confidence.
Preparation
A buyer is likely to ask many questions, and the seller needs to ensure they’re as prepared as possible with the right answers. Here’s a look into the information the seller will need:
Prepare information surrounding the business’s competitive advantage and unique selling points.
Prove how you handled ups and downs - this is especially important for seasonal businesses.
Prepare to immediately provide information surrounding leases, customer agreements, and intellectual property owned by the business. Specifically, identify which ones are expiring or would need renewing.
Explain whether you can stay on board for a while to ensure a smooth transition from one owner to another. Transition periods can be negotiated, especially if you are interested in offering seller financing / notes.
Let the buyer know whether any stocks and investments are required in the near future.
Understandably, some customers might leave the business once there is a transition, and buyers know that. However, it is up to the seller to show that customers are loyal to the business rather than the owner.
Financial Statements
Buyers will need to review at least three years' worth of financial statements filed by the business. A potential buyer is buying into the business’s future profitability, and it is up to the buyer to make them see that. Review past and current statements to estimate the business's potential after the transition.
As the seller, prepare all financial statements and tax returns going back three or four years. Make sure they are reviewed with your accountant before sending them off.
At the same time, create a list of equipment the sale will include. Another list should disclose contacts related to transactions and supplies to facilitate the transition.
Put together relevant paperwork, such as the lease - if there is one - and create copies to send to financially qualified potential buyers.
Sales and Profits
A business is an investment, but potential buyers want to see the profits. Do all that you can to maximize sales by following up on leads and calling in favors. Remove any unnecessary costs to increase the reported net profit.
Ask yourself whether there is a way to buy materials cheaply and whether switching suppliers help. Process efficiency will reduce staff or contracts, increasing the net profit.
Staff is a great tool for increasing profit, such as beefing up techniques like up-selling or cross-selling. Customer satisfaction is the key, so monitor performance routinely.
Buyers will like to see a business that functions efficiently and effectively, something greatly helped by strong internal processes. Provide them with sales records on top of the internal processes to showcase the strength of the business.
A Leading Market Position company has a strong advantage in showcasing potential sales and profits to buyers. Companies with the Leading Market Position have the largest market share within their industry. This lead allows the company to affect a competitive landscape and the market's direction - something potential buyers would love to see.
Business Valuation
A business valuation is the amount someone is willing to pay for the business and what you are willing to sell it for. Before starting any sort of negotiation, a business valuation will help narrow down the numbers so you don’t stray too far from what you think is fair.
There are many different ways to calculate the business valuation. The type of calculation used is solely in the hands of the seller. As an example, one of those valuation methods compares prices for businesses sold within the industry. Smobi is a great tool to start the research required to make that calculation.
Of course, there is no one right method to get to this number. All that matters is that the seller finds a reasonable number they are willing to accept through the sale. If you want to learn more, check out this other more in-depth article that we wrote about calculating a business's valuation.
Makeover: Curb Appeal
Much like the makeover you give a house before listing it on the market, a business should also get spruced up. Touching up a few things will give it an advantage over others, helping it sell quicker and to the right buyer.
What this means for a business is tidying up financial records, optimizing inventory and staff, and tightening control over debtors. Any fixed assets, such as various pieces of equipment or machinery, should present in working order without the buyer having to buy an immediate replacement.
Does the Seller Accept Financing?
Lastly, many potential buyers will want to know whether financing the business is an option. All-cash deals are rare, with most buyers looking to put down a rather substantial down payment and finance the remaining balance.
Seller financing, as discussed in another article, is a popular option many buyers and sellers use to close the deal. This type of financing allows the buyer to pay the seller the remainder of the balance after downpayment in installments - with interest included, of course.
This option may only work for some sellers, which is important to mention to potential buyers. It will likely affect the buyer's decision very early on. Learn more about seller financing tax implications in our other article.
Potential Hidden Complications
Buyers will want to be sure there are no hidden complications that could prevent the sale's closing. Though these will eventually come to light during the due diligence portion of the process, it’s good to be as up-front as possible.
These complications include legal liabilities, sketchy financial information, labor relations problems, poor customer service, and many others. Hiding any of these issues will become very off-putting for any buyer, likely causing the deal to fall through immediately.
Summary
Planning and preparation is the key to a smooth business sale process. Buyers want to invest in a business they believe will succeed with future growth potential. To assist with the process, a seller should anticipate potential questions and concerns a buyer might have during their business review.
As the seller, you can present the business in the best light possible. Take the time and energy to provide the seller with the information mentioned above early on to speed up the process and assist the buyer with their final decision.
Don’t hesitate to contact a professional, such as those with Smobi, to help you get started on the right foot.