Three Things Buyers Look For When Buying a Business - Firm Exchange

Three Things Buyers Look For

Post written by Firm Exchange on March 15, 2018

Selling a business is often stressful for both parties.  For a seller, the stakes are obvious.  The business may have been in the family for years.  It may be a source of pride and self-identity.  Meanwhile, buyers face large commitments of both time and money.  In this post, we will dive into three things buyers look for when evaluating businesses and how sellers can best position their listings for a quick, successful deal.

Three Things Buyers Look For

  1. A serious seller.  Buyers often sift through dozens of listings looking for the right one.  Finding a serious seller after all of that makes for a welcome breath of fresh air.
  2. Organized records.  Once they have found the target business and introductions are made, it’s time to conduct due diligence.  Having organized records speeds up what is generally the lengthiest part of the deal.
  3. A reasonable outlook.  As the current owner, you are closer to your business than anyone else.  A smart buyer wants to hear your outlook.  But don’t lose sight of what’s realistic.  Fudging your projections is a sure way to turn away buyers.

A Serious Seller to Work With

The small business landscape is full of people who aren’t serious about completing a deal.  Sellers have tools to sort out “tire-kickers” from legitimate leads.  For example, they can ask for signed NDAs or earnest money.  Buyers, however, have limited options to separate out serious sellers.  This can lead to frustrated buyers leaving the market entirely.

The good news is that sellers can set themselves apart from the field and attract more buyers by showing their intent and commitment.  There are a number of ways to do this, but here are a few key ones:

Give the bad with the good

A lot of times sellers hold back information that they think is unflattering to their businesses.  Almost invariably, a potential buyer will discover this information.  When a buyer finds out bad news on his or her own, it’s often impossible to repair that sense of distrust even if the seller has a reasonable explanation.  It is much better to get the bad news out there in a way that the seller can control.  Buyers can only trust the information a seller provides to the extent that they trust the source.  Increased trust will make the marketing of all of the good characteristics of the business that much more effective and will buoy the buyer’s confidence in the deal.

Provide timely, professional answers to buyer inquiries

A buyer is examining not only a business, but the seller as well.  By quickly giving straightforward answers to any reasonable questions a buyer may have, the seller is communicating how serious they are about going through with the sale.  Additionally, professionalism during the sale process can provide a good indication of how the seller ran the business.  Using Firm Exchange’s Diligence Tracker, buyers and sellers can quickly ask and answer questions and conduct any follow-ups in a clear and organized way.

Offer a clear reason for the sale

For a buyer looking into a private business, the first question he or she asks is almost always, “why is the seller looking to sell?”  Typically, the answer is pretty obvious: the seller is retiring from the business, for example.  But from the buyer’s perspective, the more detail the seller can provide, the more comfortable the buyer will be.

Think about ways to add some dimension to the discussion

Going back to our earlier example of a seller retiring, that retirement may be due to increased industry competition that has led the seller to feel less excited about going to work every day.  Or, it may simply be the right time in the seller’s life to move on to a new chapter.  Providing these kinds of details can help set a buyer’s mind at ease.

Organized Accounting Records Speed Deals Along

Just as the seller’s responsiveness communicates to the buyer how well (or not!) the business is being run, so too does organized accounting records.  These records contain a lot of information that is a “must see” for any buyer, so while a seller may hope that a buyer can look past the clutter, this is sadly not often the case.  By making it easier for buyers to sift through the paperwork, sellers can dramatically shorten the time it takes for a deal to close.

organized records are one of the three things buyers look for
Organized records, preferably digital, are one of the three things buyers look for.

Using professional accounting software is generally the best option, but if a seller needs to prioritize a few things to “clean up,” these are typically most important:

  • Tax records, both federal and state
  • Merchant reports
  • Real estate expenses (e.g. mortgage documents, lease information, and payments, etc.)
  • Supplier receipts
  • Payroll records

Once you have this information together and organized, it becomes a matter of how you present that information.  At Firm Exchange, sellers keep complete control over what information they disclose and at what stage.  Our online data room will keep those documents organized and secure.

Providing a Reasonable Outlook

As a part of the diligence process, a buyer will have to assess the future of the business.  But he cannot do it alone.  By helping to provide potential buyers with a realistic outlook for the business, sellers can help ground the forecast in reality and provide details that only an owner would know.

A seller may ask, “what’s in it for me?”  A few things!

  • Providing this information may shorten the length of time it takes for a deal to get done.  If you subscribe to the belief that time is money, this is all the answer you need.
  • Setting reasonable expectations, and helping others better understand the outlook, opens up the pool of potential buyers. Many buyers need bank loans in order to buy a business.  Almost every lender requires a business plan that includes realistic projections.
  • Finally, a seller communicating his knowledge about the future may help guard against legal trouble down the road.  (Once again, we are not lawyers and legal professionals should be consulted on all legal matters.)  If a seller knows the business is about to lose a major customer, letting a buyer know about it during the diligence process can be incredibly important.

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DISCLAIMER: The information contained in this article is for informational and discussion purposes only, and should not be relied upon without seeking your own professional advice. The Firm Exchange, LLC is not a law firm, accounting firm or professional services firm, and accordingly it disclaims any liability for any reliance on the contents of this article. As each situation is unique, you are encouraged to discuss your specific situation with a qualified attorney, accountant and/or other relevant professional services provider.