Selling Your Business: Predictable Questions in Due Diligence

In the event that your business becomes fodder for acquisition by an investor or investment group, you will most likely be required to go through a barrage of uncomfortable business due diligence questions. In fact, some less-sophisticated business owners may have built up a $20 million company, but may have not clue or be wholly unprepared when investors come knocking with very difficult questions when you’re attempting to sell. For the entrepreneur in the hot seat, the process may not be fun, but it is absolutely necessary. We’ve seen several deals go south because a hot-head CEO didn’t like being asked about skeletons in the closet or dirty underwear on the line. They will be asked. Here are a simple few:

Tell us about your motivation for selling the company.

This question can be as loaded as they come. If you answer with anything other than, “I’m retiring,” then investors may question whether anything is wrong. I reminds me of an old car I sold several years back. The car had nearly 300K miles on it and had transmission, caliper and rotor problems. It also needed a new pair of tires. I was explicit with the buyer with all the potential issues and they still did nothing to dissuade him. Unless the buyer is desperate to get into the field, he/she won’t ignore the petty costs and potential downsides. The opposite is inherently true: they will scream at him/her with the loudness of a fire truck.

Tell us about your cost per acquisition for each new customer. 

Today’s technology allows business owners the convenience of scaling a company quickly and rapidly like never before. As finance people are generally number freaks, they will most certainly want to put together their own spreadsheet based on plausible assumptions, some of which you will give them. The cost per acquisition (CPA) number is almost as important as the customer lifetime value (CLV) as they both influence decisions and behavior for future spending and growth.

To prepare for such a question it would be helpful to have a CRM system, complete with CPA rates for various marketing channels and differing demographics across your customer-base. This will be helpful for potential acquirers, but if you’ve not done it previously it may open new opportunities you had never thought of previously as you gain greater understanding into your customers.

Tell us about market penetration. What is your Market Penetration rate? 

When a truly savvy investor takes a look at your business he/she does so with an eye on the future. That forward-looking mentality is key when taking a look at the potential of the business being acquired, especially when synergies are valued and included in the company valuation. Here are some further follow-on questions:

  • Is there any more low-hanging fruit in the industry or has it all been poached?
  • What areas of growth do you see going forward?
  • How would you, if you could, seize more of the market within your industry niche?
  • What struggles have you had in the past with penetrating the market at a greater rate?

Know growth opportunities and be prepared to sell the buyer on what part of the industry could be further exploited. In short, sell them the hockey stick.

Name the critical members of your staff. 

When you eventually leave the company, the investors will want to have all tacit knowledge transferred to the successor. This means personnel and the like. Key members of your team that hold knowledge requisite for the successful continuation and management of your company will need to be explicitly discussed. Who has what authority and understanding a particular business function and what incentives may potentially be needed to keep them aboard after the deal closes? Without knowing this information, an acquirer could get very skittish very quickly.

Tell us about your value-proposition. 

Who buys what you sell? What do they buy it for? What are your costs? How do you differentiate yourself from the competition? What other factors make you unique and are there any natural customer switching costs built-in to your product or service?

Every business has a value-proposition–that place where they either do it better or differently enough that keeps the customers coming back. Find where yours is and you will not only acquire and keep the customer, but your business will have investors salivating when it comes time to sell.

Nate Nead on LinkedinNate Nead on Twitter
Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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