Transcription
Foreign, we're going to cover the top 10 questions that any buyer should be asking a potential seller when looking at a business. Hi, I'm Brent Freeman, and this is the CBB Group. Over the years, Bill and I have put together an established an offering memorandum that's fairly comprehensive, and we use these 10 questions as the basis on almost any transaction that we put together. So, if you're a buyer looking to buy, whether you've got a business broker on the other end, Bergeron acquisition advisor, or just the seller, this video is made for you.
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The first question is really, when you can sit down with a seller and just ask them about the history of the company. How did it get started? What was your story? And just sit back and listen to what they have to say. Once they get started, try and steer them into things like, what were the milestones that along the way that helped you build the company? And then, what would they do differently if they were 20 years younger and could do it all over again? And then, lastly, when talking to a seller, ask them about the current state of the business, just kind of where it's at and where what they're doing. And think about asking questions around, are they working in the business or on the business? And how replaceable they might be. So, question number one is, ask them about their history.
The second question that you'd want to ask is, why are they selling? And again, much like the first question on the history and current state of the business, you want to just sit back and let them tell you why they're selling and what their plans are after they sell. Or they have retirement age and just want to go play more golf or get closer to the grandkids? Are they looking for other opportunities? So, these types of questions and their motivation to sell will help you down the road when you're analyzing the rest of questions three through eleven.
The third question is around their products and services. So, really spend the time to get a really complete idea of all the product and services that the company offers. And then be asking about product or services and growth opportunities that they're not offering. But if they were 20 years younger and cash was not a problem, would they have taken the company in a different direction? Or are there opportunities to add additional product and services to their product mix?
The fourth question is with regards to the company's customer base. Do they know who their target customer is and what that looks like? Does the company have any customer concentration issues that you should be aware of? And that really is defined by any customer that occupies more than 10 to 12 percent of the company's total revenue. And you, if so, you want to take a deeper dive into that. The geographic area that those customers are in, or is it just local, regional, national? And just how they reach those that customer base. And then finally, ask them about who their competitors are. You get a lot of information from not only knowing the customer but who your competitors are. And I just asked for their top two or three competitors in their marketplace.
Number five, distribution channels. Now, asking this question is really again, sitting back and listening to them talk about how they distribute or deliver their product and services to market. You're one wanting to know in-depth a little bit more about that, but you're also looking for additional distribution channels that you might be able to use to grow that business.
Number six, and this is around growth opportunities. And the way that we usually present it when we do an interview with a seller trying to prepare an offering memorandum is to take them back 20 years in the growth of the business. Tell them cash was no option. So, if you're going to grow the business, what are other growth opportunities that you would take as a seller and try and grow the business? It can often be around geographic, additional locations, products that are probably synergistic. And if they bring those up, talk to them about what it would take to launch that. So, a fresh sheet of paper, 20 years ago, cash no options, just look at the growth opportunities that the seller might be able to talk to you about.
Number seven is the financials of the company. And this is where, if you're not comfortable doing this type of analytical work, you may want to retain an outside advisor to help you. But what you're looking for is the company's three to five years worth of their corporate tax returns, in addition to getting the three to five years worth of the individual years profit and loss statements and corresponding balance sheets. What you're trying to do is calculate and justify the cash flow of the business versus the purchase price, making sure that you can cover debt service coverage, pay yourself a salary, and get a return on your investment. Other things that you should be looking for is working capital, I.E., if the company requires working capital. If it's a manufacturer, a builder, something where there is inventory involved or a build of materials, you'll want to understand that working capital component to make sure that when you negotiate a transaction, enough working capital is being left in the business.
Number eight is taking a look at the facility. So, there are two questions that you want to ask. One, does the seller own the building that you're in? And if so, are they paying current market rent? And what will they charge you when you buy the business going forward? Or two, can you buy that asset along with the business? If it's a lease, you need to understand what the terms of the lease are and take a look at the fine print to understand if you can assume that lease, or you'll need to go negotiate a brand new lease with the landlord.
Number nine, employees. So, you want to understand how many there are, obviously. And then talk about their key employees. And the question here is, who they are, how long they've been with the company. Some offering memorandums that we produce will put the age of the employees. So, what we're trying to basically do is suggest how long they may stay with the company. But then the big question, do you want to ask about your key employees, will they stay past the sale date of the transaction? And so that's something you've got to understand. The other thing around employees is benefit packages that they currently have, medical, paid time off, how all of those things are put together. So, number nine, employees.
And finally, number 10, owner transition. So, what you're really looking to do in this question is to talk to them about what they're expecting or their role in the transition of the business once it's sold. As part of most transactions that we do, the owner transition, two to four weeks, is included in the purchase price of the business. If the owner needs to stick around longer than that, there's usually a consulting or an employment agreement put together to cover that period of time at a pretty reasonable compensation rate. And then, if it goes beyond say, six weeks to a couple of months, then you're looking for the owner to basically make themselves available for a phone call, a teleconference call, in case there are issues that come up from time to time that are unique to the business. So, number 10, ownership transition.
Well, there you have it. The top 10 questions that you as a buyer should be asking a seller when looking to purchase a business. Now, I hope you got something out of this video, and if you did, please consider hitting like and subscribe, and we'll see you on the next video.
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Thank you.