Meeting the Buyer

Buyer meetings are far more than a means of answering questions. Through these meetings, you are selling not only your business but yourself. You want to assure your buyer that you are prepared, honest, composed, and serious about selling. Working to foster a healthy relationship with your buyer will not only save you time and effort in the long run, but can actually increase the value of your business as a whole. It is a key aspect of selling a business that is often overlooked. Here’s how to do it right. 

Set a Meeting

While private equity firms and other corporate buyers are comfortable making an offer on a business without physically seeing it, few individuals are willing to do so. The majority of the information in this chapter, therefore, pertains to individual buyers.

Once the potential buyer has signed the NDA, they will get their first detailed information about your business from the confidential information memorandum. At Morgan & Westfield, when we prepare this for our clients, we include only two or three pictures in the CIM. Why? So we can leave some curiosity in the buyer’s mind and give them a reason to meet and view the business.

Interested buyers usually prefer to ask a few specific questions on the phone before setting up a face-to-face meeting and seeing the business. The goal of the initial phone call should be to set up a physical meeting, because the chances of a successful transaction improve once you personally meet with a buyer. 

Set up a face-to-face meeting and then use this time to establish a trusting relationship. Asking the buyer to invest their time in a personal meeting is also the most effective method for screening their motivation level.

Agenda for the Meeting

Immediately show your business to the buyer after a short get-to-know-you introduction. At this point, the buyer usually hasn’t seen the business and is anxious to go on a tour. Don’t sit down and engage in small talk. The only thing on the buyer’s mind is seeing the business, so don’t waste their time or yours. Show your business, then have a discussion afterward. 

My clients find that the initial meetings with buyers typically are low-key and stress-free. The buyer wants to see your business and typically has a few questions that weren’t addressed in the CIM. This is why your CIM should be designed to eliminate the basic questions every buyer asks. 

Let the buyer ask as many questions as they want, and answer them in as clear and straightforward a manner as possible. You can get to know each other during the tour when you ask questions about the buyer and share information about yourself, too.

While showing the potential buyer around, explain your business and its operations as much as you can. Show pride in your business by adding interesting tidbits about its history. You can also mention tips about growth potential, as well as what you like and dislike about your business.

Avoid the following:

• Discussing financial aspects of the transaction during the meeting
• Disclosing proprietary or trade secrets
• Negotiating the purchase price
• Discussing other terms of the transaction
• Showing your tax returns, bank statements, or other documents that are customarily only shown after an offer or LOI is accepted

When meeting with a potential buyer, keep in mind the Golden Rule: Treat others how you want to be treated.

The Importance of Honesty

Be honest. You will have more credibility if you’re honest about your business’s downfalls or any dislikes you may have. For instance, point out aspects of your business the buyer might consider changing if they purchase it, such as using updated marketing methods to more effectively promote the business.

The Importance of Consistency

Thoroughly read your CIM to memorize the information it contains. Present information about your business consistently to buyers because any inconsistencies will be noticed. If a buyer doubts what you say because your claims are inconsistent, you’ll lose the sale. For example, if you say your markup is 35% in the CIM, but later claim it’s 40% when you meet with the buyer, the buyer will feel they need to validate all your claims, and will take little of what you say at face value.

After the Meeting 

What happens after the meeting? Don’t fill the buyer’s head with too much information all at once. Keep the meeting the right length. Tell the buyer you’ll go into further detail and show them more about the business if they’re willing to come back for a second meeting. 

If the buyer is intrigued, they’ll return. Some buyers make an offer after the first meeting, and some don’t. So don’t try to sell your business at the first meeting. 

There’s no magic formula, but the right number of meetings is usually between one and four. The purpose of the first meeting is to set up the second meeting, and the purpose of the second meeting is to set up the third, and so on.

When is it time to move on?

Is the buyer requesting a sixth or seventh meeting? In such cases, don’t waste your time – move on to the next interested buyer.

Remember, when selling a business, you’re making certain representations regarding your income and other factors. These representations aren’t verified before the buyer makes an offer, so five or six meetings shouldn’t be necessary. Save the in-depth investigation of your business until you’ve accepted an offer from the buyer. This time period for investigation and verification is called due diligence.

A few meetings should be enough for the buyer to decide whether they want to make an offer and move forward. If the buyer can’t make up their mind after the fourth or fifth meeting, another meeting is unlikely to do the trick. At some point, the buyer must tackle their fears head-on and make the leap of faith. Additional information rarely appeases these buyers’ fears.

The chances of a successful transaction improve once you personally meet with a buyer. 

Is it necessary to meet the buyer face to face? 

I highly recommend meeting the buyer face to face if the buyer is an individual so you can assess their motivation level and other qualifications in person. Doing so allows you to vet the buyer and helps ensure the buyer is serious. There are far too many “keyboard warriors” who love to look at businesses online and might have viewed dozens or more businesses in the last few years but lack the courage to make the leap. Meeting the buyer is part of the phased screening process and helps you determine if they are serious. It generally isn’t necessary to meet corporate buyers.

Why is the buyer requesting so many meetings? 

Fear is the biggest deal-killer for the sale of small businesses, specifically the universal fear of the unknown. Perhaps the buyer has never owned a business and is scared to take the chance. Your job is to make them feel as comfortable as possible. If you’re financing a portion of the sale, mention that you wouldn’t finance the sale if you didn’t have faith in your business. Explain to the buyer that they will have plenty of time to perform their due diligence if an offer is made.

Sharing Information

When should you send additional information to a buyer?

It’s common to send a potential buyer financial information about your company before a meeting happens, provided there’s a signed non-disclosure agreement in place. 

If confidentiality is still a concern, there are some steps you can take to help maintain control of highly sensitive business details. You want to keep control of your business information to prevent it from getting into the wrong hands, such as a competitor, or being released at the wrong time, such as early in the process before you’re satisfied you have a serious buyer.

Enter the concept of “phased release.”

With a phased release, information is given to the potential buyer in stages. As the buyer demonstrates their continued interest in your company, you will release more data to them, with the most sensitive information reserved for later in the process. 

A phased release doesn’t guarantee that information won’t get leaked, of course, but it offers a level of protection from the tire kickers.

The following section contains more information about when and how to send your financials to potential buyers, including details on the phased release. I will also describe steps that my team at Morgan & Westfield takes as we work with our clients.

Send Adjusted Financials Before Meeting

Most M&A intermediaries and business brokers send a set of normalized or adjusted financial statements to buyers before meeting them, providing the potential buyer with an idea of the current state of the company. Nearly all business brokers and M&A intermediaries require a non-disclosure agreement before releasing the financials.

Use a Phased Release of Information

If you’re concerned about confidentiality, the best option is to use a phased release of information. Information is given to the buyer at different stages of the sales process, with more sensitive information released later in the process. Information can be provided in summary form early on and then in more detail later. For example, if a buyer has inquired about your business for sale, it may make sense to email the buyer a snapshot of your financial statements before emailing them a profit and loss (P&L) statement. This summary could contain only the gross sales, gross profit, and EBITDA or SDE for several years. More detailed information can be released later in the process, such as when you physically meet with the buyer. 

Any buyer who refuses to release information to you regarding their qualifications signals that they are either not serious or unqualified.

What Financial Information To Send the Buyer 

Always send normalized or adjusted financial statements. Never send your raw financial statements unless your financials don’t require any adjustments. Most buyers prefer to receive at least three years of P&L statements. A list of your monthly revenue for the previous three years is also helpful in identifying any seasonal or cyclical trends in your business.

We send the buyer normalized financial statements, including a common size analysis, and information on percentage changes from year to year. We send these financials to a buyer in a spreadsheet format, which allows the buyer to perform their own analysis, make notes, and perform projections. 

When To Give YTD Financials to the Buyer

At some point in the sales process, a prospective buyer is likely to request to see year-to-date (YTD) financial records for your business before they make an offer. You should be in a position to provide this information, but there are a few important points to keep in mind:

• Make it Normalized: Don’t send your raw or unadjusted financials to the buyer. Be sure you send adjusted or normalized financials. 
• Compare YTD with the Previous Year: Don’t send the buyer just your YTD financials. Send them a comparison of this year’s and last year’s results. If it’s October and the buyer is requesting to see the January to September P&L statement, send them January to September for the current year and January to September for the previous year. This allows the buyer to account for seasonality in the business and see how the business is performing relative to the same period last year.
• Revenue Recognition: This is the story behind the numbers. Beware of timing differences in recognizing revenue and expenses. You may have just landed a big six-figure job, and this may skew the results significantly. Alternatively, you may have just paid a large expense that would inflate your expenses. Most small and mid-sized businesses don’t perform proper accrual accounting and use either a cash-based or hybrid system that consists of both cash and accrual accounting. Additionally, since you’re working off interim financial statements, your accountant will not have made the final entries into your system for items like depreciation. For these reasons, it’s important to tell the buyer the story behind the numbers.
• Monthly Revenue Chart: I also recommend showing the buyer a chart of the monthly revenue for your business. Focusing on short-term trends can skew a buyer’s perspective. Show the buyer a chart of your business’s monthly revenue to prevent this inaccurate perspective.

You can also use your YTD financials as a tool to gauge interest and further qualify an interested buyer. I recommend intentionally withholding your YTD financials from your CIM. Doing so forces the buyer to request them directly, which allows you to:

• Further Screen or Qualify: If the buyer is requesting additional documentation or clarification from you, this gives you an opportunity to dig a little deeper and qualify them more. 
• Gauge Interest Level: If the buyer goes out of their way to ask you for updated financial statements, you can reasonably assume they have some level of interest in your business.

Warning: If the buyer sends you a detailed request for additional documents, such as tax returns, they are likely attempting to shop your business for financing. This is a warning sign – the buyer should request your permission to share your confidential information with third parties before doing so. If the buyer is shopping the business for financing early in the process, this may mean that the buyer doesn’t have the down payment, or they misled you by telling you that the down payment would be coming from a bank. This is rare, but it does happen. Stop the process immediately and talk with the buyer. You don’t want them shopping your business without your knowledge or consent.

Further Screening Buyers

A mutual exchange of information is reasonable and to be expected during a transaction. Any buyer who refuses to release information to you regarding their qualifications signals that they are either not serious or unqualified. Therefore, it makes sense to deeply screen buyers. Let’s examine some of the reasons next. 

Screen Buyers in Phases to Determine Their Interest

Requiring buyers to jump through a number of hoops also allows you to determine their interest level. Most buyers understandably get frustrated or offended if you attempt to pre-screen them all at once early in the process. The solution is to use a phased process, both in screening and in releasing information to the buyer.

How to Screen Companies

When screening companies, you can ask for financial statements, references, a buyer profile, a disclosure statement, and a list of past transactions. You can also independently research the key people you are dealing with by Googling their name, email address, or phone number, or checking their social media profiles. In addition, you can obtain someone’s IP address from the metadata in emails and documents, which can supplement your search. We frequently identify suspect individuals who initially contact us and arouse our suspicions after searching their background.

Managing Due Diligence

Sensitive information can be held in a centralized room or office at your home or business. This allows you to give the buyer access to this room and the sensitive information without making copies or sending the information over the internet. Alternatively, you can create an online data room in the cloud. If you’re comfortable with the buyer and confident with the transaction, you can, at that point, provide the buyer with hard copies of all information.

Key Points

• A phased release of information is best, especially if you have any looming concerns with regard to confidentiality. 
• The safest route to take before providing sensitive information is to ensure you’re working with a qualified buyer who is serious about the purchase and financially able to complete it. 
• Ensure that a confidentiality agreement is signed before any sensitive material is released to safeguard you and your company against any unauthorized use of information or intellectual rights to your business as a whole. 

High-level negotiating skills are not as crucial as you might think.