When Selling Your Business, Don't Waste a Buyer's Time
How to properly answer the question: Why are you selling your business?
Why are you selling your business? This question often serves as an ice breaker for the initial meeting between a buyer and seller, but, more importantly, it gives the buyer a sense of how strong the motivation is for the seller to carry through with the transaction. This question helps buyers discern whether they are wasting their time in pursuing the acquisition.
As a vendor, it is important to understand that acquisitive strategic buyers and financial buyers need to turn over a number of rocks before actually making one investment. On average, private equity firms will look at 250 opportunities before writing a check. There is a huge time commitment and financial cost to see an acquisition to the finish line, so acquirers try to weed out the vendors that are not 100 percent committed to the process. If you are really interested in selling your business, you need to demonstrate that commitment to potential buyers so dead deal costs are avoided.
The Five Ds of Business AcquisitionMany experts say that the best opportunity to buy a business presents itself when one or more of the "Five Ds" — death, divorce, disability, disenchantment or desperation — are present. I don’t necessarily share such a cynical view of the selling process, but there is truth to that comment. If the proper motivating factors to transact aren’t present, the chances of a deal crossing the finish line are slim.
The very definition of fair market value is the price at which a willing buyer will purchase the business from a willing seller. In my experience, sophisticated buyers who get a sense of disingenuous reasons for selling a business will walk from the deal. On the other hand, a buyer that senses one of the Five Ds may try to use it to their advantage to obtain a better purchase price or favorable transaction structure. It is definitely a delicate balance for the sellers.
Tips on Answering the Question: "Why Are You Selling?"Many sellers play the game of acting as if they don't need to sell their business. I think they believe this will get them a higher purchase price. This couldn't be further from the truth. All this does is scare buyers off. Here is my advice to answering questions about why you are selling:
Be honest. Corporate acquirers have usually seen it all. If you are tired, say you're tired. If you want to take some chips off the table, you have the right to do that. There is no need to get into the details of why at this point. Just state the reason, briefly and concisely.
Be consistent. Make sure your management team or ownership group involved in the process all have a similar answer to this question. Buyers sometimes use the divide-and-conquer technique. There are two versions of this tactic. They ask two different managers or owners the same question and compare the responses. Or, two different people from the buyer-side will ask the owner the same question and then compare notes. This technique will highlight any inconsistencies in the story. If there are conflicting stories within the management team, buyers run the other way. Buyers also use this technique as a due diligence tool to assess the robustness of a company's procedures, the effectiveness of internal communications and the alignment of corporate objectives in the company for sale. If all managers provide similar answers to the buyer's questions, a buyer will gain confidence that everyone in the organization is on the same page.
Insist that now is the right time to sell at a fair price. This gives you an opportunity to talk about all of the value that you have created in your company. You should also indicate that you have a reasonable expectation for the purchase price. You do have a reasonable expectation, don't you?
Age Appropriate Responses John Warrillow, author of the best-selling book Built to Sell, offers the following suggested responses based on your age:
If you’re under 40, you clearly aren’t ready to retire, so you need to communicate that you see an upside in merging your business with theirs: "In order for us to get to the next level, we need to find a partner with more <insert sales people, distribution, geographic reach, capital or whatever the partner brings to the table>."
If you’re between 40-55 years old, most people will understand the need to shore up your personal balance sheet: "I’ve reached a time in my life where I want to create some liquidity from the value I’ve created so far, and at the same time I want to find a partner who can help us get to the next level."
If you’re over 55, you can start to talk about retirement, but you want to make sure you communicate that you still have lots of energy and passion for your business.
Showing Commitment to the Selling ProcessOne of the most compelling ways a seller can show commitment to the selling process is to hire an investment banker. As an investment banker myself, this advice might seem a little self-serving, but hear me out. Buyers recognize that investment bankers' primary objective is to maximize the purchase price, but they also see the value that they bring to the process. Investment bankers organize all of the necessary corporate information, manage the valuation expectations and establish the seller's sales objectives. The fact that a seller takes the time, effort and cost to engage an outside professional demonstrates that they are ready to sell.
The First and Last QuestionIf you are selling your business, I guarantee that early in the process, you will be asked why you want to sell your business. If you don't answer it well, it could be the last question that you get from that buyer.