Here’s a list of some common questions you are likely to be asked when the time comes to sell your business. You really need to start considering these questions long before the sales process starts - sometimes years in advance, so you have fixed the problems as far as possible. That way the sale will go more smoothly.
Selling a business is similar to selling a house or car, with the buyer (or professionals acting for the buyer) trying to uncover any serious problems - but also hunting for weaknesses that could lower the price. This process is called due diligence.
The seller meanwhile has to spend a lot of time answering what are sometimes tedious questions - but at the same time this is an opportunity to confirm what the business is worth.
For small businesses the buyer may decide not to hire professionals to do due diligence on their behalf, but may do it themselves. Though this may make the process much more informal, you should still take it very seriously.
There are more notes about how to approach due diligence below the list.
Top questions to expect
1. Why do you want to sell the business?
Retirement, ill-health, even boredom are all common replies, as is the desire to raise money for a new business venture or to buy property. This question may also be an indirect way of asking whether the business is in any difficulty - see question 3 below.
2. What are your own plans after the sale?
If you wish to retain a role in the business - as consultant, employee or part-owner say, this needs to be thoroughly clarified, written down and agreed.
They may also be checking whether there is any chance of you competing with them in the future. If this become an issue it may be worth negotiating an explicit no-compete clause that meets both sides’ needs.
3. What difficulties does the business face?
This is one of those open-ended killer questions. Preparing a SWOT analysis beforehand may help suggests topics you’d be comfortable talking about. Your aim is to be honest without reducing the price to an unwarranted extent. You are under no obligation to provide free consultancy advice to the next owner, but you should reveal material facts. If there are serious issues confronting your business - particularly ones affecting its future viability, discuss what you have to reveal with a suitably qualified professional advisor.
4. What exactly is included in the sale?
This question may come up several times so it is best to give a fully comprehensive answer from the outset. The buyer may seek clarification as they look over your premises or become aware of different aspects of your operation. For example, if you are a designer, what about the intellectual property in past designs? What about the use of your name?
5. Can I see the books?
This means you have to have the accounts in a fit state to show. They need to go back at least three years.
6. Are these the same accounts you’ve shown Her Majesty’s Revenue & Customs?
Let’s hope the answer is yes!
7. Have you any charts or simple figures that summarise how the business is performing at a glance?
The buyer is likely to be interested in things that give an immediate idea of the health of the business without having to wade through the accounts, such as the trend in sales or net profit. Presenting them clearly is useful as part of your sales pitch, but remember they become part of the sales documentation and must be true.
Key performance indicators relevant to your own particular line of work that might not be in the accounts are also relevant - for example the occupancy rate for a hotel or care home, or the breakdown of sales by product line over time.
8. Are there any big debts?
They’ll be looking particularly for overdue debts from customers that might need to be written off, but also the level of debt your business typically carries.
Strictly speaking in accounting terms debts are your current liabilities, which includes things like any lease or service agreements you are committed to. These can affect the sale price if they are hefty items.
Outstanding debtors (unpaid invoices on the sales ledger) are classed as assets. What the buyer will be checking is whether they are really assets, or likely to turn into unpaid bad debts that have to be written off.
9. Are you up to date with your own payments?
For key items such as rent, loan repayments, income tax, VAT if you are registered, corporation tax if the business is a limited company, PAYE if your business has employees.
10. Have you any employees and how are they paid?
The answer needs to include full-time, temp and unpaid staff. The buyer may also be checking there are no illegal or off-the-books payments.
11. Are you involved in any legal disputes?
For example, with suppliers, trading standards or the tax authorities - or former partners or staff.
12. Are there any major items of expenditure due soon?
The buyer is on the lookout for things like the renewal of key equipment, major maintenance or a lease expiring. Though a good answer to this question is generally no, because you have taken care of such things while preparing the business for sale, there is one pitfall to beware of.
If you spend heavily in the run up to the sale, there’s a risk the buyer may not value what you’ve done because they have other plans. This is another instance where there is a strong similarity between selling a business and selling a house - new garden decking won’t lift the value if the new purchaser wants to rip it out and use the space for a pond. So keep the focus on essential items for the core business you think all buyers will be interested in.
For other items honestly stating what needs renewal and accepting that this may lower the price may be cheaper for you than renewing it yourself and still having to accept a lower price - because the buyer turns out to have other taste or plans.
13. How did you arrive at the asking price for your business?
Ultimately your business is worth what someone is willing to pay for it, so how you have arrived at your valuation is strictly speaking completely irrelevant. You need to decide whether it is in your interests to talk about it.
Sometimes it is, if going through the assets, goodwill, future earnings potential and so on will whet their appetite and encourage them to pay more.
But on other occasions this discussion just invites them to negotiate you down on each element. In this case a better tactic might be to decline going into detail about your own thought processes. Just assert that that’s the price at which you are willing to sell.
Your other answers, particularly to questions 1 and 3, may be relevant to what line you can plausibly take.
14. What element of goodwill is build into the asking price?
This is another way of asking you to justify the price. If you choose to answer you would need to say firstly what the business is worth without goodwill (that is with just the value of tangible assets and order book). Then you’d need to give some reason to back up the extra value that goodwill (in other words intangible things like a good reputation and happy customers) adds to your business.
With some businesses everyone will accept that goodwill is a key part of the business being sold, so you would devote attention to it in your pitch. This might be the case for businesses where trust, repeat business or word-of-mouth recommendation is very important, for example private exam tuition, health spas, restaurants. With others it’s either hard to quantify or irrelevant because customers have little choice, like a tee-shirt concession at a music festival.
15. Have you got any happy customers who can supply testimonials?
You may have some you use for sales purposes that are already public. Think carefully before revealing more. You need to protect you customer list in case the sale doesn’t go through, as it may be one of you most valuable assets. On the other hand, the buyer needs to evaluate the quality of your customer list. They may also need reassurance that your business has a good reputation. So some give and take is necessary.
Another factor to bear in mind is the reactions of the customers themselves. If they get wind of a possible sale it may unsettle them and cause them to go elsewhere.
Why due diligence matters
Whatever it is called, answering a lot of questions is an essential part of selling a business. Both sides are likely to need many things clarified before they feel comfortable about going ahead.
It’s a good idea to keep copies of the answers you give. Confirm verbal answers immediately by letter or email. This is because if a dispute arises later - for example the purchaser attemps to get part of their money back because of a problem they claim you hid from them, you will be able to prove that they bought the business fully aware of the facts.
During due diligence it is important not to misrepresent the facts, as that could come back to hurt you later. Indeed the advantage of “full and fair disclosure”, if it is well documented, is that it can protect the seller in later disputes. Once a problem has been disclosed the buyer cannot use it to complain or seek compensation after the sale has gone through.
The importance of confidentiality
The one big difference between selling a business and selling a house or car is that confidentiality is much more important in the business case. There are many more people with a stake in the outcome, and customers, suppliers and staff can all be seriously alarmed if you reveal your plans too soon.
You should have an exit strategy for you business, but exactly when you reveal it to others is a critical part of a successful sale. So it is normal practice to keep discussions with potential buyers and their representatives quiet until the deal has been finalised, and to agree with them how it is made public.
Disclaimer: The opinions expressed are those of the author(s) and are not held by PRIME unless specifically stated. The material is for general information only and does not constitute legal, accounting, tax or other personalised advice. You should not rely on this information to make (or refrain from making) any decisions. It is not a substitute for independent, professional advice for your own particular situation.
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