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December 6, 2013 — A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.
By Leonard Holler, WSBDC Regional Director
“What questions should I ask the seller to get the ‘real’ story behind my business purchase?” Joyce, Casper
According to an article by Mike Handelsman, from BizBuySell.com, most buyers ask some basic questions about the company's financial performance and value. The sellers are usually ready with answers that best represent the company. However, the buyers’ questions usually do not unveil enough information to make an informed decision.
The five must-ask questions for an investigation are listed below.
-- When did the seller decide to sell the company? Buyers will ask sellers about why they are exiting, but not about when they decide to put the company on the market. Discovering a seller’s timing can be more important than learning a seller's motivation. If there was no plan to sell the business and suddenly there is, it could be due to family or health reasons, or it may be a sign that the company is in trouble.
-- How did the seller determine the asking price? By understanding how the seller set the price, is it possible to gain information that will be important during negotiations. Sellers frequently use an asset-based or income-capitalization method for the sake of simplicity, but another valuation method could be more accurate.
-- What are the seller's desired outcomes? It may be assumed that a seller wants to walk away from a sale with cash, but they may have a variety of non-cash outcomes that they hope to achieve. A seller may be interested in making sure that the business will continue for its employees. Some sellers are interested in seeing the company grow and also have the desire to stay, just with less involvement. A willingness to accept seller-financing can help determine eagerness to get the deal done. Never assume a seller is motivated only by financial outcomes, so this information can be used as a negotiating tool.
-- How would the seller grow the company? Since a seller has a stake in convincing buyers that a business is poised for growth, one way to get a more honest answer is to ask a seller for specific strategies that they would use to grow the business, such as what obstacles might be encountered and what it would take to put those plans in motion. This question can help to gain insights about how to expand the business or it might create the need to reassess its potential.
-- Will a seller agree to a non-compete? What if the owner sells you the company only to launch a new business and take the business's existing customers with them? To reduce this risk and uncover a seller's true motives, ask if they are willing to sign a non-compete. This will give an indication of the true value and if a deal should be made.
Although there are plenty of healthy businesses, there also are some lemons. The best way to protect an investment and achieve goals is to expand the normal list of questions and discover the company's condition and potential.
A blog version of this article and an opportunity to post comments is available at http://www.wyomingentrepreneur.typepad.com/blog/.
The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, email email@example.com or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.