🟠 16 questions to ask when selling a business

The SMB Scoop is the newsletter to help you find, buy, operate, and invest in cash flowing small businesses.

I recently wrote an newsletter post for aspiring SMB buyers on what questions they should ask titled 16 questions to ask when buying a business. It had a great response from subscriers.

A number of current SMB owners reached out asking for what a seller should be assessing in a buyer.

Those preparing to sell their company in the next 1-2 years are in a perfect position to start to understand the buying market in general, how they want to go to market, and what questions to ask when they have a number of potential buyers lined up.

Selling your business is not merely a financial decision but also a choice about who will steward the legacy of your life's work.

1. Do I like this specific buyer?

Selling to someone you trust and respect can make the transition smoother for you, your employees, and your customers. Your intuition about a person's character can be as crucial as their financial qualifications.

Money is easy to find, but integrity is worth it’s weight in gold. You want to find a buyer who you trust to do the right thing with you and your employees.

2. Is this buyer legit and do they have a track record?

Verify the buyer's credibility and past business engagements to ensure they have a history of successful and ethical dealings. This can offer peace of mind that your business's reputation will be upheld.

Take a look at their internet history, social media posts, and past work experience. You should feel comfortable they can take over and the team will have confidence in their abilities.

Does they seem like a credible buyer? If not, move on, there are plenty of fish in the sea.

3. Is the price and structure fair and acceptable to you?

Evaluate if the offer reflects your business's true value, considering not just profits but also market position and growth potential.

The top line number is only one part of an offer. A $10M offer can come in many different formats and risks for the seller

It gets complicated when buyers throw in different aspects to structure the deal - sometimes to your benefit and sometimes not.

Offer A: A $10M all cash offer with no consulting period after close

Offer B: $10M offer that is comprised of $5M of cash, $2M earn-out on the company meeting a certain EBITDA threshold (but with upside of up to $2M more if certain outcomes are hit), a $3M seller note that may or may not be paid out in the future based on the long-term viability of the business, and a 12 month required full-time consulting period

Offer C: $10M offer with $8M of cash and $2M of rolled equity in NewCo

As you can see $10M looks very different and deal structuring usually matters more than top line price.

4. Is there anything unique or concerning about this particular LOI or offer to buy??

Scrutinize the offer for unusual clauses or demands that could indicate potential risks or complications down the road.

This is where paying a business broker or investment banker will provide you a ton of value. They’ll be able to quickly determine if there are any red flags or issues that would devalue the offer or mean higher risk to you in getting the outcome you want.

Legal counsel review is also recommended.

5. Is there any contingent consideration (seller note, earn-out) that could be taken away from you after close?

Understand any earn-outs, seller notes/financing, or performance bonuses post-sale, as well as your specific post-close involvement.

Clarity on these terms ensures that you are aware of what is required to receive the full compensation.

Any money not in the bank is technically at risk.

6. Are there better alternatives to selling?

There are so many options and alternatives to selling your company. You are in the driver’s seat.

Consider all options, such as mergers, acquisitions, hiring a GM/operator. Some of these might save you time & energy and reduce your involvement in the business. Possibly even consider selling to a long-time trusted employee who can continue on the legacy of the business.

7. How long will it take this buyer to close and what are the potential roadblocks for you or them to deliver?

Timing can be critical. A fast close may be important to you, or you may prefer a longer period to ensure thorough due diligence and a smooth transition.

I would encourage you to set clear milestones that the buyer needs to meet so that you are all on the same page in terms of expectations and deliverables. This should be acceptable to any buyer who has a good understanding of all the hundreds of tasks that need to be completed in order to successfully close a transaction.

Buyers/sellers are on different ends of the spectrum here. Buyers want as much time as possible (to reduce risk). Sellers want as little time as possible (to not miss out on a better buyer). Find a middle ground.

8. What is the source of funds to pay you (Loan? Investors? Personal bank account?)

Knowing where the money is coming from can signal the buyer's financial stability and the transaction's reliability.

A loan will require a longer diligence period and a third party involved. Don’t want to deal with a lender? You’re probably going to have to take a lower price.

If a buyer has investors, that is potentially a risk. Is the capital raised already or do they have a stable of investors ready to go? I’ve seen the chaos behind the scenes in trying to get a deal closed and sometimes investors are the reason deals die or are unable to be funded.

9. What are your plans for my current employees and management?

The future of your employees is often a top concern for sellers. Understanding the buyer's intentions can help ensure your team's well-being and maintain operational continuity. Do you want the staff to be retained?

These are important topics you should address with a buyer upfront, and creating limitations around what buyers can and can’t do will have an impact on the value and structure buyers are willing to propose.

10. Will there be any integration challenges?

Anticipate potential issues in merging systems, cultures, or operations, and discuss how these might be managed to preserve the business's value and functionality. While it’s the responsibility of the buyer to execute, you should be on the same page if you have any shared risk.

You want the buyer to be successful.

11. How long will the transition period take (and will I be retained as an employee post-close)?

Clarify your role post-sale to align expectations and prepare for your own future, whether within the company or moving on.

It is customary that you sign a non-compete with the buyer for 3-5 years. A buyer who is paying you for your company has enough risks in front of them, they do not want their company & livelihood being stripped away from a competing seller. Keep this in mind as you communicate and plan for your own future if it involves anything related to your former company.

12. Why ‘my’ company? Does it fit within the buyer’s claimed criteria?

Understanding why a buyer has chosen your company can reveal their strategic intentions and ensure alignment with your business's direction and legacy.

I view it as a red flag if a buyer is seeking construction related companies on their website but is considering my medical device company. I don’t think that feels like a very serious and focused buyer. That buyer may not have the capability, understanding, or experience to close a transaction.

Industry experience may be necessary for a buyer. Some industries are super difficult to learn or require technical expertise.

As an example, here’s my buying criteria. A smart seller would ask, “why do you want to buy my business if it’s only $300K of EBITDA and doesn’t meet your criteria?”

13. What are your long-term goals for my business?

This is a great get to know your buyer question. Understand why they’re excited about your company as quickly as possible and ensure there is a clear fit. Knowing the buyer's vision can give some pretty good insights into what the buyer is about, what they value, and why they’re spending time with you.

14. Who will be managing the business day-to-day?

The person managing the company has a huge influence on the company's trajectory and viability long-term. If the buyer will be managing the business, do they have the skillset & capability to be successful? Will the buyer be hiring an operator? What does that mean for the company, it’s employees, and future opportunities?

15. Will there be additional growth capital?

Inquire if the buyer plans to invest further in the business. This can be a sign of their commitment to the business's growth and a reassurance of its continued development. Some growth plans will require investments into new services or verticals, and having a plan for how they will fund the growth is important.

16. If I have continued ownership (rollover equity), will I have the same rights and current & future investors?

If you retain an ownership stake in the business, it's vital to understand how your rights as a passive investors may change and what say you'll have in future decisions that may impact the business.

Remember terms have a big impact on the value of the instrument. I asked ChatGPT “Please list typical investor rights for rollover equity in a business transaction”, it came up with a solid list of key investor terms. In other words, if you don’t know…use ChatGPT to help educate yourself.

Looking to…?

• want to hire quality global talent? Click here, I can help you find your next incredible global hire.

• invest passively in SMBs? Join Accredited investors only…check out the SMB Junction Capital Connector investor network to get in the flow of off-market deals (self funded, independent sponsor, private equity)

• raise equity capital? Submit your deal under LOI for free to the SMB Junction Capital Connector to get intros to value-add accredited investors

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The SMB Scoop 

Ben Tiggelaar

Things I’m currently working on: www.bardocapital.com, www.smbjunction.com, www.datatelco.com, capital raising service for independent sponsors