When a buyer is interested in your small business, they will want to engage in a thorough examination often referred to as the due diligence process. Whether you plan to find a buyer for your small business or plan to sell to a business partner, employee, or family member, the due diligence process is a crucial step. If you need a refresher on just what due diligence means, just click here.
This process is for both parties and providing accurate information and transparency are very important. In fact, a business purchase agreement will likely require that you provided accurate information to the buyer during this process. Sure, this can be somewhat intimidating and one of the best ways to reduce the stress is to be prepared before a prospective buyer is ready to engage. Good news, we’ve got you covered!
The type of business you operate may require specific information. A retail business may have a lease that provides ample walk-in business whereas a service-based business may rely far more on internet-based leads and some businesses rely heavily on equipment and a buyer will want to know specific information about the condition.
ExitGuide provides owners with a checklist of more than 50 questions from a buyer that you should anticipate when selling a small business. Here are some of the most common questions buyers will ask during the due diligence process.
10 Questions Buyers Typically Ask When Evaluating A Small Business
Why are you selling?
This is very likely the first question a buyer will ask so be prepared to provide a thoughtful and transparent reason. Your answer will set the tone for the rest of the process. If there are several reasons, that’s okay, just make sure you can explain the biggest reason that is driving your decision.
Do you plan to sell 100% ownership of the business?
A new owner will want to control the business and key decisions and this often means full ownership. Partial ownership can work but it can be a more complicated legal agreement when it comes to allocating responsibility for day-to-day operations.
Will you commit to supporting me during the transition process?
It’s good for your business, your customers, and your employees. If you plan to have seller financing then setting up a new owner for success is important for you as well. It is common to have a separate agreement with the buyer that details everything from how long you will work with the new owner, fees for your time, and key deliverables.
What are the debts/liabilities owed by the business?
Liabilities should show up on the balance sheet you provided to a potential buyer who will certainly want more detail on the payment terms and any risk associated with paying the debt from proceeds generated from the business. You will want to have the fully executed (signed) copies of any loan agreements ready to share.
Please describe how you think the business will grow over the next 3 years?
Providing 3 or more years of profit and loss statements is part of the due diligence process. A buyer will also want a forecast for the next two to three years and an understanding of the assumptions you made for revenue growth and related expenses. Using historical data as part of your assumptions makes perfect sense and you will also want to explain how increasing sales or marketing efforts can impact growth.
How many hours per week do you spend working on your business?
One of the key factors from a buyer’s perspective is how reliant is the business on YOU. Can it operate without you? Of course, this assumes a new owner will replace you directly or with someone to manage day-to-day operations. A new owner is probably ready and willing to work hard but within reason. If the business is all-consuming or too reliant on an owner/manager to make it work it may well be a major turn-off for a buyer.
Do you maintain a database of customers and how is it updated?
It’s okay if you run your business with pen and paper but if you want to attract a buyer you will want a digitized list of customers. The more information you have the better but at a minimum, their contact information and history of revenue are essential. Knowing how much business is recurring and thereby predictable will give a prospective owner more comfort in maintaining revenue after the transition period.
How many employees do you have and how long have they been employed?
A change of ownership often creates uncertainty with employees, especially those that have been employed for years so how you break the news is important. A new owner will need to understand everyone’s role and if any key employees need extra attention during the transition.
Do you plan to hire additional employees, if so, what roles and how long have those been open?
It’s no secret that the labor market is tight. A buyer will want to understand your hiring plans. Why you want to hire for a role gives a prospective buyer insight into what the business needs to grow or run more efficiently.
What is the most frequent complaint from customers?
Of course, you want to put your business in the best light possible and if you are reaching due diligence, it is safe to assume that those reasons are what attracted potential buyers. As the owner, you also know the issues your customers raise and it is helpful to share these issues along with steps you have taken to address them. No business is perfect so explaining the issues along with what has and has not worked builds trust and demonstrates your grasp of what is truly happening.
Being prepared before you talk to a buyer gives you a head start
The best advice we can provide is to not wait until asked for information to get it ready. Generating a profit and loss statement and current balance sheet that you can review allows you to catch any errors or omissions and make updates. Gather key agreements, business formation documents, and anything else you think important and save a copy in a folder or upload everything to your ExitGuide account. When the time comes, you’ll have the necessary items at your fingertips and keep the momentum going toward a final deal.