4 Traps To Avoid When Selling Your Company
Business owners have been known to refer to due diligence as "the entrepreneur's proctology exam." It's a crude analogy but a good representation of what it feels like when a stranger pokes, prods, and looks inside every inch of your business.
Most professional acquirers will have a checklist of questions they need answered if they consider buying your company. They'll want answers to questions like:
When does your lease expire, and what are the terms?
Do you have consistent, signed, up-to-date contracts with your customers and employees?
Are your ideas, products, and processes protected by patent or trademark?
What kind of technology do you use, and are your software licenses current?
What are the loan covenants on your credit agreements?
How are your receivables? Do you have any late payers or deadbeat customers?
Does your business require a license to operate, and if so, is your paperwork in order?
Do you have any litigation pending?
In addition to these objective questions, they'll also try to get a subjective sense of your business. In particular, they will try to determine just how integral you are personally to the success of your business.
Subjectively assessing how dependent the business is on you requires the buyer to do some investigative work. It's more art than science and often requires a potential buyer to use several tricks of the trade, such as:
Trick 1: Juggling calendars
By asking to make a last-minute change to your meeting time, an acquirer gets clues as to how involved you are personally in serving customers.
If you can't accommodate the change request, the acquirer may probe to discover why and determine what part of the business is so dependent on you that you must be there.
Trick 2: Checking to see if your business is vision impaired
An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, he or she may ask your employees and critical managers the same question. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.
Trick 3: Asking your customers why they do business with you
A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and, therefore, expect to hear good things. However, the customers may be asked, 'Why do you do business with these guys?' The acquirer is trying to figure out where your customers' loyalties lie. If your customers answer by describing the benefits of your product, service, or company in general, that's good. If they respond by explaining how much they like you personally, that's bad.
Trick 4: Mystery shopping
Acquirers often conduct their first bit of research behind your back before you even know they are interested in buying your business. They may pose as a customer, visit your website, or come into your company to understand what it feels like to be one of your customers.
Ensure the experience your company offers a stranger is tight and consistent and try to avoid personally being involved in finding or serving brand-new customers. If potential acquirers see you personally as the key to wooing new customers, they'll be concerned that business will dry up when you leave.
Mark Hartmann is a three-time Inc 500|5000 CEO with a rich sales, operations, and leadership background in the insurance, financial services, and healthcare sectors. With extensive experience growing and selling his own businesses, Mark leverages his expertise to help owners grow and sell businesses valued at $1M —$25M. He’s earned a master’s degree in organizational change management from St. Elizabeth University and a graduate certificate in executive coaching from Columbia University. Mark’s professional certifications include Certified Mergers and Acquisitions Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB).