Have you always wanted to own a company and are currently thinking of buying a business? Purchasing a business that is already established comes with many advantages. You’re acquiring a business that has already garnered a favorable reputation, sound financial track record, loyal employees and has good relationships with vendors and suppliers. By purchasing an established business you avoid the initial money-crunching startup years. You could say that most of the hard work has been done already.
However, as attractive as buying a business might be, it is of paramount importance to take time to explore seller motivation. If there is a business that’s caught your attention and everything checks out, ask yourself why the owner is selling? Perhaps they may have told you they plan on retiring, wish to spend more time with their loved ones, travel, or are burnt out. These may all be true but perhaps there are other deeper issues they haven’t disclosed. So, how do you confirm a seller’s motivation?
1. Talk to the seller’s business brokers
Who do you approach first when planning on buying a business? A great place to start is the seller’s business brokers. As a buyer, you can get more information about the seller’s motivation from the seller’s own broker. Ask them why the business is up for sale. A broker may even help shed light on some issues the seller might not be able to fully express but which can help all parties get the deal signed. This is a good starting place.
2. Pay attention to the seller’s reaction to your offer
After considering the offer price, make a legitimate offer to the seller. Their response can help you gauge their motivation. If they make no counteroffer to a low offer it is very telling. If you offer full-price and they STILL counteroffer this may indicate a desire to discuss and negotiate more. The more you continue to pander and counter offer the clearer the seller’s motivation becomes.
3. Is the seller offering price reductions?
It is not unusual for businesses that have been on the market for a significant amount of time to begin to offer price reductions periodically. You can generally tell a lot about the seller’s motivation (and urgency to sell) by merely observing how the initial offer price keeps decreasing. This isn’t to say there is anything wrong with the business per se. It may just be an indicator that the seller is keen to sell the business as quickly as possible. Although, there is a fair chance there might be something wrong which you may need to dig to uncover.
4. Have an honest conversation with the seller
This may seem obvious but a lot of people never ask the deeper questions about why the seller is selling their business. The seller may have personal motivating factors for selling the business such as needing to step away so they can spend final moments with a terminal spouse or loved one. Some may need the money to pay for medical bills for life-saving surgeries. At times the sellers may be heirs who don’t wish to run the business. The motivation to sell may be an unexpected one.
5. Establish the seller’s sale urgency
When you take the time to have an honest conversation with the seller, you will get a good idea about the seller’s sale urgency. The sale urgency often mirrors the seller’s motivation. Motivated sellers are generally looking to close the deal as quickly as possible. The more desperate they are to have the business off of their hands, the stronger their conviction, motivation, and interest in selling.
6. The seller has business papers in order ready to sell
A motivated seller will have their papers in order prior to buyers even asking. This shows serious thought has been given to the exit plan. Warning bells should go off if the seller is disorganized and cannot provide basic company documents such as audited financial statements. Someone who is ready to let go of the business will have their ducks in a row and be ready to get things moving because time kills deals.
7. The seller is open to negotiations and not hostile
Sometimes sellers aren’t emotionally ready to sell their business because of attachments. After discussions, you may find that they are being pressurized to sell but in all honesty, they’d rather hang on to the firm. It’s not hard to see that such sellers may not be altogether motivated to sell. In fact, they may drag negotiations over small issues. One of the biggest impediments may be sellers with an unrealistic inflated notion of how much their business should cost despite contrary figures from a business valuation.
8. The seller is concerned about business continuity
Sellers with noble intentions can be seen by the level of concern they have for the business’ continuity. Succession planning, the welfare of their clients, and employees are important to them. They want to know the details of what will happen to the business post-sale. Will the business be stripped, merged, or sold to another company? A seller who takes time to talk about these sometimes overlooked aspects of mergers and acquisitions probably has the right kind of seller motivation.
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Sun Acquisitions is a strategic broker and M&A firm that can assist buyers and sellers with comprehensive acquisition and exit plans. Take advantage of our expertise and years of experience when pursuing mergers and acquisitions. If you would like advisory services don’t hesitate to contact us for more information.
Disclaimer: Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.