Questions To Ask The Seller Of A Business
June 23, 2012 6 Comments
Here is a checklist of questions for a buyer to ask the seller of a business and in this order:
1. How the market operates? Get the broad picture initially by learning about the market place of the business, how its product is facing up to competition. Get the competitor profile, growth rate in the market and whether the business is beating the market or just following it. You can also find out latest market trends.
2. Who are customers & suppliers? Ask the buyer to talk about his customers and suppliers. Some of them may be known to you. It is better to a dwell little more here not the least because you want a lot of names but to assess how critical they are, in terms of volume and value. Also you must ask the buyer about credit terms offered and obtained. Will these terms continue to be in force once the business changes hands is yet another clarification you need.
3. Who is the staff? Number of staff, the gross emoluments and their experience should engage your attention. Key members and how important they are is also a relevant question. Will the staff be happy to get a new owner? Ostensibly, their cooperation is vital for the sale and transition to new owner. Staff is, in essence, in every business which is of course not saying a lot.
4. What is the Bottom line? By now you have got a feel of the business. But one caution: do not fall in love with the business on first sight. Ask the seller to trot out numbers in profit and cash flow. Look at the profit; look more on the cash generation. When buyer gives you copies of last 3 years financials pore your eyes over the bottom line.
5. External relationships: You can chat with him at length on the question of his relationship with bankers and government departments. You must see whether any of the relationships are strained.
6. What exactly is he selling? Be very clear about what he is, in fact selling.Generally a sale of a business involves the name, operational assets, working capital, and human resource and so on. You must be clear whether present loan outstanding is to be transferred to you or the seller would extinguish it. Another moot point is the real estate, which may or may not be transferred. In case of leased property, you have to ask him whether it is a transferable one. If the business is located in a supermarket, you should ask about the transfer of legal right to you. In sum, you have to clear legal and administrative issues before you proceed further.
7. Prospects after you buy: This is putting the seller in your shoes. After you buy his business what happens to it. How sales, operations, profit, finance will be played out? How quickly you will go through the learning curve in running the business. How this downtime can be minimized? In as much as you love to get answers to these questions about your running business, seller would tend to be reticent and if egged he would be very brief. You must watch his reaction sharply for any nuances that indicate the business is made only for him and after him it is deluge.
8. Will seller be on board? After the sale is done will he continue to be in the board for a limited period is a follow-up question? At the prompt of any negative answer from him you must conclude your discussion and walk out. A seller must be responsible for what he has vouched all these times and in turn assure you his support. He has to introduce you to staff and outsiders; he has to guide and counsel you. If he is going to vanish on the following day you would better drop this matter.
9. Will seller arrange part-finance of the sale price? This is where seller’s external relationship especially with bankers matters. If the seller is an acceptable person he would be able to arrange part-finance of sale consideration through his own bankers or perhaps financiers known to him.
10. Why he is selling? If everything is neat and fine, why the guy is selling his business. Most sellers will cite that they are retiring. Some like to take a long vacation or move out to another state or country. Chronic illness or health issues could be a reason. Sometimes they are selling to settle their children or fulfil a divorce settlement. If the seller is vague in answering this question it must put you on guard
11. What is the price? Instead of talking price at the first go, you ask it as the penultimate question. Definitely his price has padding: he must have added a lot of goodwill. Most sellers are too emotionally attached to the business and they want a hefty price. Or perhaps this is the only cash earner for him. Whatever the reason behind him inflating the ask price, you must keep your powder dry. Do not say bluntly that the price is too much. Ask him how far he is ready to negotiate so that a matter can be closed in due course.
12. How do we take it forward? Never leave the seller without getting his idea about how you and seller take the matter further. He would have his suggestions; listen to these and speak your mind loud. Do not leave with a bland “will let you know”. Go positive and say “let us proceed together”.