Seller's Top Dollar Check Up
Business owners have been known to refer to the due diligence phase of selling their business as "the entrepreneur's proctology exam. It's a crude analogy but a good representation of what it feels like when a stranger pokes, prods, and looks inside every inch of your business.
Most buyers will have a checklist of questions they need answered as they consider buying your company. They'll want answers to questions like:
- 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?
In addition to these objective examination questions, buyers will also try to get a subjective sense of your business. In particular, they will try to determine just how integral you are personally to the success of your business. If you have kept your business records in good shape and are operating at peak performance your business might easily pass the objective exam. It’s the results of the subjective exam that cause many buyers to walk away.
Most people that are looking to acquire a business aren’t looking for another job. They’re interested in buying a business that is currently operating at a profit and providing the owner with a healthy income and work/life flexibility. The more dependent your business is on you, the less a buyer will be willing to pay you for it. Buyers will want a thorough examination to discover how dependent your business is on you, and what the side effects will be if you’re no longer showing up every day.
Subjectively assessing how dependent the business is on you requires the buyer to do a more thorough examination. It's more art than science and often requires a potential buyer to use a number of their own business health check-up examinations, such as:
Health Check-Up #1: Checking your free time reflexes
By asking to make a last-minute change to your meeting time, an interested buyer gets clues as to how involved you are in operating the business or 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.
Health Check-Up #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 your team members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.
Health Check-Up #3: Checking for owner addiction
A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and, therefore, will expect to hear good things. However, the customers may be asked a question like 'Why do you do business with these guys?' The buyer is trying to figure out more than your customer satisfaction scores. They will be seeking to understand 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 bad.
Health Check-Up #4: Checking for sales dependency
Acquirers often conduct their first bit of research behind your back 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. Make sure the experience your company offers a stranger is tight and consistent, and try to avoid personally being involved in finding or serving brand-new customers. If any potential acquirers see you personally as the key to wooing new customers, they'll be concerned business will dry up when you leave.
To get Top Dollar for your business you’ll need to pass all four Check-Up examinations. To learn how sellable your business is today, get your Value Builder Score and contact us for a free consultation on how you can increase the value of your business.