What to Ask When You Call
Buying a Business - What to Ask When You Call
Calling sellers and brokers on their business opportunity ads takes time! It’s a weeding-out process that calls for some pre-call planning.
There are five key questions you should ask when you first contact a seller or broker about the business listing they have for sale. There are also some sub-categories of questions you may want to use. This is not a ‘due-diligence’ checklist of all the questions you need to ask before you buy, but it’s a start.
Getting answers to these initial questions will save you time. If a seller or broker is not giving you the right answers, move on to the next ad!
What’s for Sale?
It may seem obvious to ask, “What’s for sale?” You want to know the name, location and type of business. But, sellers and brokers will be evasive to preserve confidentiality. Realize that they need to qualify you as much as you need to qualify the business. It’s a two-way street, and it starts with the first contact.
If they hesitate, share information about yourself up-front. Try to prove you’re a serious buyer prospect. Agree to confidentiality. Tell them what you can afford for a down payment. If you have relevant business experience, make sure they know about it. Make sure they know you are motivated by more than idle curiosity. Make sure they know you are not gathering information for competitors.
After you have complied with whatever process they require for proof of qualification and interest, then you can expect to get the name, location and type of business.
You probably also want to ask them the size of the business: annual sales and earnings and how many people are employed. Ask what is included in the proposed sale (like real estate, equipment, and the seller’s consulting and non-compete agreements). These aren’t all the details you need, but now you are ready to go to the next question.
What’s the Opportunity?
Ask why it’s a good deal. What opportunity does this business offer? What’s special about it? What position does it have in its market? What’s the ‘up-side’ potential?
Listen for information about what you are buying: customers, employees, market position and operating systems. These are the key elements of any business. If the seller or broker is willing to tell you the business ‘story’ in this first contact, listen for information in these categories.
Don’t let the seller or broker bog you down in a narrative history of the business that doesn’t address your questions.
If the seller or broker veers off the subject, gently guide them back to focus on telling you their thoughts on why buying this business will be a good deal for you.
How Was the Price Determined?
Surprise them, if you can, by asking how the seller determined the price. When you ask it, avoid the temptation to fill the conversational pause that may follow. This question often catches sellers and even brokers off guard. The next few seconds after that question is asked are important. Listen carefully to what is, or isn’t, said. The seller’s pricing strategy is often secretive and/or mysterious. Sellers and brokers who are not prepared for this question may tell you more than they intend.
Most sellers who have chosen to be a ‘FSBO’ (For Sale By Owner) will flub the question and reveal their pricing ignorance and negotiating secrets. Answers like, “Well, the mortgage balance is . . .” may tell you that they are focusing on what they need and not what makes sense for you. Or, it may expose their real motive for selling, as in: “well, the mortgage balance is about $200,000 and we just want out!” Or, it may reveal pathological tendencies, as in: “well, the mortgage balance is about $200,000 and we have to recover our losses for the last ten years, so . . .”
Most brokers will handle this question much better than FSBOs. They will probably avoid explanations that would later commit them, or their seller clients, to any particular pricing rationale. They may even change the subject trying to find out what, besides price, motivates you.
You will probably base your buying decision and offer, like most buyers, upon your estimate of the potential profitability of the business after you own it. But it can occasionally make sense to pay more than what others consider ‘fair market value.’ Location, lifestyle and other strategic factors can make a business much more valuable in the eyes of some buyers. For obvious reasons, sellers and brokers prefer to work with this type of buyer.
If there are strategic issues that matter to you, you may, or may not, want to let the seller or broker know about it. You may choose not to share this information if you are preparing for price negotiation. On the other hand, without knowing your motives, sellers and brokers won’t be able to be creative in their response to your needs. Different buyers will choose to handle this differently.
What’s the Financing?
Ask if the seller has given any thought to how the business can be financed by a buyer. How much money is the seller looking for as a down payment? Will the seller finance some of the purchase price? Is there another lender involved (like a bank or a former owner)? Is there an assumable loan? What is the current balance of each loan the business has now?
This is an essential area of inquiry if you are trying to save time. Most sellers are unrealistic in the early stages of selling their business, even if it is listed with a broker. Sellers usually hope for an all-cash buyer. Most buyer prospects are unrealistic, too! Buyers are often looking for 100% seller financing! In reality, the ‘average’ deal is closer to 30-50% down in cash from the buyer with 50-70% financing from sellers and/or banks.
It is very important to find out how much of your cash the seller and broker think is needed to buy and run the business. If expectations vary too much at this early stage, you may be wasting time. You will typically need cash for the down payment, closing costs and working capital.
Most sellers, when they start the selling process, don’t understand the needs of business buyers. So, whatever you say to a seller, be gentle and proceed slowly to avoid offense. The first contact is the wrong time for a detailed discussion of what the seller is willing to do for you. Keep the discussion general in this early stage.
At the same time, you must realize that you will probably need seller financing. Banks are not likely to lend to buyer prospects without specific and relevant business experience. This is true for most small businesses where the bank anticipates that the owner must also be the manager. Experienced buyers can get bank loans. Most first-time business buyers need seller financing. Sellers are much more likely to finance buyers they like, regardless of experience. But, it can take time for sellers to warm-up to this idea and to a particular buyer prospect.
Why is the Current Owner Selling?
Ask why the seller is selling only after you have a comfortable conversation going. Get as much of the seller’s or broker’s confidence as you can before you ask this question. It is critical for you to know this information. You want to get the answer that the seller and broker may otherwise be hesitant to tell a stranger.
Sellers have many motives for selling. Some are obvious. Some are not. It may take time to get to know a seller and his/her real motives for selling a business. It may be that the seller is sick of the management role, doesn’t really know how to grow the business any further, is ready for retirement, is moving for lifestyle reasons, or is physically ill. Or, it may appear to be one or more of these reasons, but actually may be that the seller has knowledge of pending new competition or some other change that will be damaging to the business.
If a seller has run the business for a very long time, then the motive for sale is probably the usual management fatigue or retirement that needn’t concern you. But, even if the seller’s motive seems clear, you will later need to take a closer look until you figure out what’s happening. A clue to the seller’s attitude about the future of the business is often the amount of seller financing being offered. If a seller is offering to help finance your purchase, there is probably no cause for alarm.
Most sellers will answer honestly if you are persistent. An experienced broker probably knows the real motives for the sale and will give you straight answers early on, if not to be honest and helpful, then to avoid embarrassment or to comply with disclosure requirements. Sometimes, however, brokers don’t really understand a seller’s motives, especially in the early stages of a listing. Most sellers have difficulty expressing themselves when first asked.
You need to start asking this question now because you may have to ask it several times to get the complete answer. There may, in fact, be several reasons for the sale and you should know them all.
Searching Can Take Many Months
My business broker colleagues have often confirmed my experience that even successful business searches can take many months. Many buyer prospects endlessly spin their wheels in business searches that do not produce results. Many waste time pursuing the wrong candidates because they fail to ask these simple questions. They waste hours, weeks and even months meeting with sellers and brokers, researching markets and crunching numbers.
Usually, after answering whatever initial questions you ask, sellers and brokers will invite you to a meeting and/or offer to send you more information. Before you invest more time, however, be sure you have qualified the business. Does it interest you? Is it an opportunity worth pursuing? Can you afford it?
There are still many more questions to ask in order to be ready to make an offer. But, answers to these questions offer a good beginning litmus test before you commit more time to acquisition research on a specific target business.
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The cyclical nature of the economy can add uncertainty to the timing of an acquisition, or an exit from a business. However, unlike the clarity of an improving economy or the risks inherent in a downturn, buying or selling at a market high creates a unique set of challenges.