Buying and selling businesses is a process that can be compared to snowflakes. How is that, you might ask? Because no two deals are ever the same. The nature of this process depends on people – and no two people are the same, and people are unpredictable. In fact, that is the best word to use when describing the endeavor of buying and selling a business. Unpredictable.

Yet, despite the unpredictable nature of the process, one thing can be counted on as a guaranty of every deal – and that is the buyer will have questions. Get ready for questions. Lots of questions. Questions, questions, and more questions. It’s natural and to be expected, and part of a buyer conducting their proper due diligence. However, there are times and places where certain questions are appropriate, and other questions should be tagged as contingencies for due diligence. The stage of the deal can have an impact on the questions that matter most to buyers.

When business brokers meet with a buyer prospect, there are a variety of questions asked.

• Why do you need to buy a business?
• How involved of an owner are you going to be?
• How much are you willing to write a check for as a cash down payment?
• How far from your home are you willing to drive?
• Are you looking to relocate if the business is out of town or out of state?

These initial questions get to the heart of what a buyer is looking for. There are common questions and issues each buyer has upon initially reviewing a business. In the confidential marketing material business brokers and sellers aim to address those questions as best as possible while still maintaining the confidentiality of the business. Here are the top five questions buyers ask when buying a business.

1. Is the Seller Flexible?

In other words, is the seller set on their asking price? Buyers are looking for deals. Or, at least probing to see how cheap they can get the business. Some business brokers represent businesses to buyers with a blind recast. This one-page document shows the last three years of financial information, so a buyer knows the financial figures. Often buyers look at the asking price before this document. Buyers want to know how much room they have to negotiate the price down.

2. Is Management in Place?

When a buyer asks this question, it can be a hint they seek to be an absentee owner. Absentee owners are not necessarily absent from the business, but they manage from afar. They are not involved in the daily operations of the business. A buyer asking about management often needs somebody there to run the business daily. If there is not a general manager, is there an employee that could be? While the employees are important, too, buyers initially want to know the structure of the business. This information should be weaved into marketing materials when listing a business. It’s important to answer as many buyer questions as possible in the information provided – while at the same time maintaining confidentiality.

If there is management in place, and the buyer does not want management in place, then that is a conversation to have with the seller at the appropriate time. That management salary is now carried to the bottom line and can used as leverage for a better asking price.

3. Where is the Business Located?

This question is one of those that should not be answered without an NDA. It is a natural question to ask. The buyer cannot be blamed for asking. However, if the business is being marketed confidentially, sometimes revealing the location can give away the business’ identity, thus compromising confidentiality. Most business listings market businesses with vague geographic descriptions. For example; “This West Coast based vitamin & supplement company manufactures and ships its own products.”

A blind listing does not give away much location information, but buyers can ascertain general location and geographic information. Providing a vague enough description without violating confidentiality. Buyers want to know the location, which they will eventually learn precisely where it is. But initially, be careful about revealing too much geographic information if confidentiality is important. Get an NDA in place with a buyer before you reveal the name and address of the business.

4. Will the Seller Finance any of the Deal?

Seller financing is a topic in and of itself. Some sellers like it. Some don’t. Sometimes it’s required by a lender. Sometimes it’s not. Sometimes the lender does not want a seller note involved in the deal. But just about every buyer I have ever met asks this question. My response to buyers is the same as the conversation I have with sellers before we list the business.

Seller’s price, Buyer’s terms.

Buyer’s price, Seller’s terms.

In other words, the closer a buyer is to full price, the more flexible the seller needs to be as to how we get there. The further a buyer is from the seller’s price, the more demanding on the terms the seller should be. By introducing this philosophy on the front end with sellers and buyers, it opens the door to flexibility on the back end and can help get deals done. In reality, sellers should be open to any offer, whether they will accept it or not is another thing. Buyers should be willing to give on the price if they are going to ask the owner to take a risk by seller financing some of the deal.

5. Can I See the Tax Returns?

The answer to this question depends on the process being used by the seller, or the brokerage, when it comes to revealing certain information. The truth of the matter is tax returns just show you what the business paid taxes on. The true value of a business is found in between the top line and bottom line of a tax return. That is where the cash flow is. The discretionary earnings of the business must be recorded on the tax returns, or if there are no tax returns, then the profit & loss statement. This is what the one-page financial recast shows. The discretionary earnings of a business are items included in the tax returns but on various lines or in different statements, and, perhaps, labeled as something else altogether.

For example, a “Miscellaneous Expense” for $5,000 on Statement 2 of Form 1120S , Statement of Other Deductions, is an item to probe further into. What is this expense, exactly? If the owner of the business says it was a family vacation the business paid for, then provides documentation to prove it, that expense becomes a discretionary item and is part of the SDE. If that expense is for a part of the business’ operations, then it is left alone. The gist of this example is that tax returns can only confuse buyers sometimes…IF they are not familiar with what they are looking for.

So, the short answer when a buyer asks about seeing tax returns is, while business brokerages may differ in their advice to buyers, yes, you can see them, but only as a part of due diligence.

The Value of Buyer Inquiries When Buying and Selling a Business

A thorough buyer will have many, many more questions they ask over the course of a deal. A lender, too, will have multiple questions over the course of financing. While predicting what a buyer will ask is impossible, business brokers notice certain questions are common amongst buyers. Some questions can easily be answered on the spot, while others need to be addressed at certain junctures of the process.

Ultimately, a buyer is going to ask whatever questions necessary to make them feel comfortable about the deal. A seller should be open-minded and patient when working through due diligence so as to accommodate the buyer and make them feel good about the acquisition. If one has answers to the above five questions, then they are on their way to getting a deal done.