The first two questions you must be prepared to answer when selling your
business.
At Transworld Business Advisors we represent thousands of business owners seeking to sell
their business. Although each business exit will have its’ own variations of due diligence
questions and requests, the first 2 questions that a buyer typically asks are “Why are they
selling? and How did they arrive at the price”? The response to these two questions should be
well thought out as they may have an impact on the negotiations with a potential buyer.
The first question is very simple to answer, but extremely important in setting the course of the
sale. If the reason for selling the business is retirement or relocation, there is a sigh of relief
from the buyer. These two answers are easy to understand and acceptable. The buyer will
verify the age of the owner(s), and inquire about the owner’s plans on where, why, and when
they are relocating. The timing of the retirement or relocation could be a factor. If the
retirement or relocation are eminent with a deadline certain, the buyer may use the timing
against the seller in a lower offer. Also , an owner using the retirement reason at the age of 40
may raise some red flags, and relocating in the next county may as well. When selling for
retirement and relocation it is important that no time element is disclosed, and the business
continues operating as usual until the business is sold.
Another reason for selling the business may be to focus on other business interests. There are
many occasions at Transworld Business Advisors Cleveland West where we have sold a business
for an owner so they can concentrate and consolidate their capital resources into one business
or industry. Are you familiar with the proverb “if you chase two rabbits, you will not catch
either one”? Entrepreneurs can experience burnout or boredom when they are spread too
thin. It is important to recognize this early and sell the business. When a buyer perceives the
business is not getting the attention it needs, they typically will give a discounted offer and ask
the seller for financing or structured earnouts.
Other reasons for selling the business may be Death, Disability, Divorce, Disagreement, and
Distress. These are known has the five D’s. Selling a business due to one of the five D’s may
bring about some legal and emotional challenges. It is extremely important to have all legal
issues resolved and have agreements in place before putting the business on the market for
sale.
The second question, “how did the seller arrive at the price?” should also be easy to answer if
you have completed a valuation on the business. Businesses are valued based on their last 3–5-
year history of earnings and the potential future sustainability of the earnings. The earnings
used are classified as EBITDA (earnings before interest taxes depreciation and amortization) and
SDE (Seller Discretionary Earnings). In business valuation the earnings are the result of the
tangible assets and intangible assets working together to produce profits.
Business valuation is a combination of art and science. We have written full articles on this
topic alone. For this article we simply are informing you that when you are ready to sell the
business, that you have a business valuation analysis completed. Understanding the fair market
value and pricing the business for sale are key to a successful sale. Pricing the business too high
will result in low activity and pricing the business too low you may be leaving money on the
table.
There will be many questions addressed in the sale of a business and these two will set the
stage. It is critical to address the reason for the sale and have a logical valuation analysis to
support the asking price. If you are thinking about selling your business, we encourage you to
contact Transworld Business Advisors of Cleveland West. We will provide a free confidential
consultation and educate you on how to sell your business for the highest price at the most
favorable terms.
Email me today at [email protected] for information on how to sell a
business, business valuation, and exit planning services.
