As anyone who has ever done it before will tell you, buying a company is a process. It can take anywhere from a few months to a couple of years to complete. To reduce uncertainties and understand the business as much as possible, buyers must conduct thorough due diligence and ask the right questions. Finances, potential synergy, liabilities, customer relationships, and key employees are just a few areas that the buyer should consider.
Here are five essential questions buyers should ask during management meetings when acquiring a company.
1. Why is now the best time for you to sell your business?
- There can be a variety of reasons why a business is started. Someone may believe they can improve a process or make a product cheaper. Or they may have just wanted to escape the 9-to-5.
- Regardless of why a business is started, it is essential to understand why the owner(s) is now ready to sell. Age and/or desire to retire are frequently cited reasons for a sale. The owner may be having difficulty with making the financials work and needs a capital infusion or believes he can’t take the business to the next level on his own.
- Sometimes the business is family-owned in which the current owner grew up, but they are not as passionate about the line of work as the founders. (Alternatively, family-owned businesses could have multiple family members who don't get along and want to get rid of it.)
The question behind the question: “Is this a good company to buy?”
2. Which employees are bringing in revenue and which have established relationships with the key customers of the business?
Is it the owner, someone from the management team, or someone else? Are there strong non-compete/non-solicitation agreements in place should these people leave?
It will be critical to know the answers to these and other questions relating to the major customers of a business. A large part of a company’s value is its customers. Ensuring the customers are retained through and beyond an ownership transition should be one of the number one things a buyer should focus on.
If the owner has critical customer relationships, buyers should consider including an earn-out component to the offer that pays over several years based on meeting specific mutually-agreed performance targets.
The question behind the question: “Are the key customers going to leave when the owner sells?”
3. Who are the key employees? Are they committed to staying with the company after a sale is completed?
Most business owners we represent are extremely proud of what they've built. Generally, the owners are concerned with what becomes of the company and its people after it is sold. Often one or more of the owners will be interested in remaining with the company after the transition period. This can be a good sign that the business is worth the investment.
In any business, some employees will be more key to its success than others. Identifying and utilizing those key people will help facilitate a smoother ownership transfer. These individuals, often in leadership roles, can have long-term relationships with the firm’s customers/suppliers and be well-respected within the company. Other employees will frequently take their clues on how to react to a company’s sale from these people.
Building relationships with these key employees who have operational and institutional knowledge of the company is an essential aspect of buying a business. A common practice for sellers to help ease potential buyers' concerns is to pay a bonus to key employees if they stay for a certain amount of time after a sale.
The question behind the question: “Will the people who made this company successful still be here in a year?”
4. Why do your customers prefer you rather than others?
Customers come to expect a certain level of service or value in the price they pay. It will be up to the buyer to meet or exceed those expectations after a sale is completed or risk losing those customers. Buyers should also carefully read customer terms/contracts to determine if they can legally fulfill agreements already in place.
Does this business compete on price? Has it grown due to its personal relationships? How does this business differentiate itself from other companies in the marketplace? What marketing efforts have been most effective in growing the business?
These and other questions will paint a better picture for the buyer on retaining the key customers after a sale.
The question behind the question: “What are the competitive advantages?”
5. If you were in my position, what would be your top concerns with purchasing this business?
This may reveal hidden concerns of the owner and/or management down the road. It could be that the seller has a significant amount of older equipment that must be replaced in the next few years, or there have been low investments in raw materials. Pending or potential litigation could also be cause for alarm.
No business is without risk. Although there are possible upsides to risk, the possible downsides should be considered too. In an acquisition where potentially millions of dollars and future legal responsibilities are exchanging hands, buyers should enter negotiations with both eyes open to understand the asset or assets they are buying as much as possible on the front end.
Even if the seller does not reveal any deal-breakers, it may provide a glimpse of how forward-thinking the company is regarding how it anticipates external threats to the organization.
The question behind the question: “Are there any potential economic and/or legal landmines on the horizon that should be avoided?”
Buyers should attempt to dig in on their responses, so they understand what is truly motivating the seller. If the seller is presenting the company as being successful, why are they selling it? Does the owner give any red flags in their answers? Will this company operate successfully without the seller in place? Does the owner have concerns about the future viability of the company or industry?
Buyers will never eliminate all the risks associated with acquiring a company (and that shouldn't be the goal), but by asking the right questions and understanding what the answers they receive could mean, they can reach a comfort level in completing their due diligence so that an informed decision can be made.
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ABOUT BENCHMARK INTERNATIONAL
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $6B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.