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Tough sell?

13 June 2018

Eight tough questions a potential buyer of your business might ask – and how to work out the answers.

When you run your own business, you have enough worries on your plate already: turning a profit, recruiting and retaining good staff, managing relations with suppliers, fending off competition – the list goes on and on.

But when you come to sell, you face a very different kind of challenge – one that may be entirely unfamiliar. Any potential buyer will want to get under the bonnet of your business and may ask all kinds of questions you’ve never had to consider. Some may be difficult to answer; others may call for commitments you’d prefer not to make.

In such cases, it’s possible to be floored by something you hadn’t thought of. That makes it all the more important to plan ahead and work out what you’re willing to commit to, how to calm some of the obvious buyer fears, and how to ensure that you’re selling to the right person.

Listed below are eight of the toughest questions a buyer can ask, together with how to think through your answers.

1. Will you lead the business for a further three years after the sale?
Buyers often want someone on board who knows the business and the market in order to mitigate risks and help integrate the business beyond the deal. It might work for you, but first ask yourself: could I work for somebody else and, if so, what will my motivation be? Once you’ve worked that out, scrutinise the deal structure carefully and be crystal clear about what’s being offered to you before agreeing.

2. Would you help us to rationalise and integrate your business into our core and wind down your operation?
“It’s down to personal choice: your moral, ethical and professional values and what you can live with,” says Martin Brown, chief executive officer of Elephant’s Child, an SME growth advisor. “Many entrepreneurs are emotionally attached to their business and take a moral and ethical interest in how colleagues and employees will benefit from a deal. So, think carefully about what a good and willing buyer looks like to you and whether your potential buyer fits that profile. If not, are you prepared to walk away from the deal?”

3. What are the biggest risks impacting your earnings/growth forecasts?
Before you embark on a sale, it’s crucial to identify key risks by carrying out a professional, comprehensive and accurate risk assessment. You need to demonstrate unequivocally that you have identified and understand your risks, have taken action to mitigate or remove them and put adequate monitoring and protection in place.

4. Is your valuation an equity or enterprise value?
“This is a typical example of confusing jargon in sales,” says Brown. “Equity value is enterprise value minus net debt and a surprising number of people misunderstand this. Be sure you know what’s included in the deal.”

5. Will you indemnify us against claims or proceedings for infringement of patent, copyright, trademark, trade secrets or other intellectual property (IP)? 
“You cannot prevent third parties initiating legal proceedings against your company,” explains Dr Anthony Thomson, growth planning specialist with Elephant’s Child. “But you can verify that you’ve got a comprehensive IP strategy in place encompassing IP protection, employee conduct and confidentiality; that will ensure that your IP is well-managed and protected. You will likely need to confirm that you’ve never knowingly infringed any third-party IP, that trademarks are registered following appropriate registry searches, and that any opposition raised to your chosen mark has been addressed.”

6. Do you mind if we only purchase the business assets?
“It’s common for larger organisations to acquire the assets of the company rather than the shares,” says Thompson. “Assets such as IP, brand, digital, customer contracts, stock, plant and machinery, are transferred; this should not be confused with asset stripping. It simply enables buyers to leave behind undesirable things such as unfavourable contracts, various liabilities, pension debt. For the seller, who is left to use sale proceeds to pay off company debt and windup costs, the key question is: does this proposal fit with your strategic aim for exit, including, timing, effort and valuation?

7. Can you guarantee future business growth projections?
Obviously, a guarantee isn’t possible. Instead, demonstrate rigour in understanding past and future client demand, your mix and profitability by client, offering and sector. Provide evidence of strong account management to grow and retain existing clients and acquire new ones; and evidence of your ability to profitably launch new offerings.

8. Do any key customers, suppliers or other relationships depend on specific individuals?
Trading on the length and depth of personal relationships can be seen as a risk and lead to a discount to the business valuation – or even kill a deal. “You cannot sell the founder or owner, so you need to have people in position to take over your important client relationships,” says Thompson. “Ensure comprehensive, demonstrable succession plans for all management, and leave key staff firmly in place so that your customers don’t leave, which could reduce the value of the business.”

 

 

 

​​Exit strategies may include referral to a service that is separate and distinct to those offered by St. James’s Place.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

 

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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