In my last post, I covered the top three questions every buyer will ask, but now we are turning the tables to make sure we (the sellers) get our important questions answered as well.
Most “chemistry” calls run between 60 and 75 minutes. I advise my sellers not to go beyond that amount of time, as it starts appearing like you don’t have other things to do or other buyers to talk to (even if you don’t). If they don’t appear to be done asking their questions at the hour point, I suggest you let them know you only have 15 minutes left and you have a few pressing questions you would like to ask before you schedule a follow-up call to answer their remaining questions. It is important that you manage this time wisely and NOT let the buyer consume the entire time with their questions.
I see most calls starting with some small chit-chat, usually around location of the buyer/seller and maybe a little personal introduction. Many buyers, especially strategic ones, like to talk a lot about their company and how they have grown it over the years, etc.; partially to impress you and partially to impress themselves (yes, there is a little ego associated with this).
Private equity firms tend to focus on the amount of funds under management and their fund-raising efforts. Then they usually discuss some of their key portfolio companies or the one specific one they want to tuck you into (assuming you are not being viewed as a portfolio company). In either case, if they continue on too long with their intro, be sure to let them know that you have a hard stop at such and such a time and you have a few questions you want to make sure to ask.
Again, as I mentioned in my previous post, I have compiled a list of 32 questions which I use to prepare my sellers; 16 are those that I want them to be prepared to answer, and 16 are those that I want them to ask on the call. While all of the questions are good, you probably won’t get a chance to ask each one.
Here are my top three questions you should be sure to ask:
1. What interests you about our company?
Why? This will tell you what their future vision is for your company and whether you are a platform purchase or an add-on purchase to extend their reach. Knowing this answer will help you determine if your company can increase their accretive value – meaning: 1) will their revenue increase by acquiring you? and 2) are the products or services you provide easily sold into their existing customer base? If you know that, you will be able to significantly increase their sales. This should also increase the multiple your company is worth to them.
If you are going to be acquired as a portfolio company, I would ask a follow-up question with regards to their experience in your industry or other portfolio companies they have acquired and then later sold.
2. What are your top considerations when evaluating a company to acquire?
Why? Are they looking for intellectual property (IP), a new vertical, geographical reach, human capital or just additional customers?
If speaking to a PE firm, it will more likely will be about industry experience, your differentiating factors from your competition, the strength of your management team, and back office. As I discuss in my book, Get Acquire for Millions, and earlier blog posts, these two different buyer types (financial vs strategic) approach deals differently and value company attributes differently.
3. What are your long-term plans for the company?
Why? This is a key question if part of your sales proceeds is transitioned into the new company as equity. If there is a plan to sell in the next five years (as is the case many times with PE firms), how likely is your value going to increase with the remaining equity in the new company? If you’re speaking to a strategic buyer, you want to know if they are rolling up smaller companies to eventually sell to a larger one down the road.
Ok, I actually need to add a fourth question. Sellers usually don’t like to ask this one, but it is key to understanding how you are going to get paid. If you are using an advisor, you can leave it to them to ask. If you are working without one, you need to get comfortable asking this. No one will take offense, I promise:
4. How do you plan to fund the acquisition?
Why? Do they have enough cash? Will they need to pay with a note? This could indicate how much you will receive up-front as cash vs. being paid in installments. If the buyer needs to secure financing, this could be an issue, unless they already have a letter from their bank indicating their borrowing capability. You should request proof of funds or the ability to borrow BEFORE you sign an LOI. *
When speaking specifically to a search fund (aka dry fund), meaning they don’t have their own assets under management, you need to be sure they will have these funds secured PRIOR to you signing the LOI. Most all PE firms (with the rare exception) will leverage the deal with debt. Be sure to understand whose books that debt will sit on – more relevant to a portfolio company acquisition, but worth asking even if not.
*If you are running this transaction on your own, never, never, never be shy about asking for proof of funds. I typically ask for both the P&L and Balance Sheet (most buyers just give you the P&L). The balance sheet, however, is really where the strength or weakness of a company lies. Even if the company is extremely profitable, if they are too strapped with debt, it will become a problem in the end. Also require that any external Letter of Credit is issued externally, not just an email from the buyer saying they have one. Get it on separate letterhead from the facility providing the debt.
If you want to learn more about the other 13 important questions you need to ask, then be sure to download our resource guide. I guarantee you will find some gems in here.
Top 3 Questions Every Buyer Will Ask – Do You Know YOUR Answer?