A key question that many people ask before they buy a business is “the reason for the business being for sale”. The reason the owner of the business is selling his/her business. This might seem simplistic, but I feel that it is more important early on than the numbers. I think it should be one of the first things that is asked (and is by most experienced purchasers). The reason for this I think is simple - it puts the rest of the conversation into context!

Most purchasers I talk to get around to asking me what the reason for sale of the business is somewhere in our initial conversation and it is generally the “...and by the way what is the reason for sale?” At that point most purchasers think at best the reason given is just broker talk and at worst bull. The standard response is “If the business is so good why would the owner wish to sell?”. Now if you don’t believe what your broker says this could be a very valid question, but what springs to my mind is: if you don’t believe what a broker is saying to you don’t deal with him/her.

We spend a good period of time trying to get an understanding of the motivations of the seller. There are the normal ones:

    * Been in it a long time and had enough.
    * Don’t want to be the richest guy in the graveyard.
    * Spend more time with the family.
    * Use my boat more.
    * Want to do something else completely different.
    * Health or retirement.
    * We haven’t travelled.

·         I am not qualified to grow it to the next level

·         I can’t get access to credit right now

·         I need a partner to help me grow it

All these are valid and excellent reasons, but they are not enough for a purchaser to be able to buy in and accept the reasons why the owner wishes to exit. The broker has to drill down so he/she gets to the part of the story that people understand. For example from above: “How long is enough? Which part of the business are you sick of? How much money have you made for how long? Have you had health problems? Has there been a scare in the family? Where are the family? Are they offshore? Retirement, where? Doing what? Where is the boat? What type? Fishing or sailing? Inshore or offshore? Where do you want to travel? How long? How will you do it?”

The context that a purchaser is then able to apply to the rest of the conversation and during the balance of the dealings on that opportunity means he/she is able to mentally walk in the owner’s shoes and understand the decisions that have been made. Also, if you empathise with the owner’s situation/motivation you will build a better relationship with him/her, will get better answers to your enquiries and will better understand them.

We have taken a business to the market recently and we have taken the time to really understand the owner’s motivations. So when we are explaining those motivations to the prospective purchasers, we can feel them relax when they understand and accept the thought processes the owners have gone through to put the business on the market.

This business is a great business run by a husband/wife team. He looks after the business of doing business and she looks after the money. A very good team who have been in business a long time. Mrs Owner wants to retire, play more golf and get away from the day to day pressure of business ownership. They are members of a nice golf course (Paul and I have played there a number of times and understand why you would want to play there more often). Mr Owner feels that if Mrs Owner is not looking after the money side of the business he doesn’t want to own the business. He has been able to concentrate on the business safe in the knowledge that the back end was being looked after. He is happy to stay in the business as an employee as he is not yet ready to retire, but because the team is being broken up he no longer wishes to own the business.

We accepted the reasoning given by our clients and because we drilled down deeply enough we are able to pass this on to the prospective purchasers rather than just telling them that the owners wish to retire. It gives the purchasers more comfort when they understand.

I think it is human nature not to trust what you don’t understand. So if you understand and accept the reasons why the owner is looking to exit it stands to reason you will be more comfortable with the balance of the information you receive and are more likely to complete the transaction.

If your broker is giving you a one-pager of information on the business (which resembles the window card car dealers put in their cars), and he/she doesn’t volunteer the reasons why the business is on the market, I feel then that you, as a purchaser, would need to drill down deeper to find whether you accept the reasons given. Gaining comfort here should determine how you proceed through the transaction?

David Newport and Paul Devcich are principals at Switch Business Ltd – Business Sales & Acquisitions experts.