Questions You Should Be Prepared to Answer Before Buying (or Selling) a Small Business
Dec 21, 2023
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Get insights on frequently asked questions in small business transactions, the importance of proper accounting services, key questions for buying or selling a small business, and understanding greenfield vs. brownfield customer acquisitions for assessing business potential.
Buyers should analyze the source of the opportunity, sources and uses, earnout payments, debt package, and external due diligence reports.
Acquisition entrepreneurs must understand GP and LP economics, equity waterfall, searcher's own investment, and seller-related factors like seller profiles and transition plans.
Deep dives
Transaction Basics
Transaction basics are the foundational elements of any transaction. Buyers need to understand the source of the opportunity, whether it's proprietary or competitive. They should also analyze sources and uses, including dollar amount, EBITDA multiple, and percentage of total sources and uses. Additionally, buyers must determine how earnout payments will be funded, explore details of the proposed debt package, and assess reports from external due diligence providers.
GP and LP Economics
For acquisition entrepreneurs outside the traditional search model, understanding GP and LP economics is crucial. Important questions include the percentage of carry the searcher will receive, the proposed GP LP split and vesting of carry, whether external investors hold participating preferred shares, and if they receive seniority in the capital structure. Other aspects to consider are equity waterfall differences, whether the searcher invests their own capital, and the number of board seats.
Seller Considerations
Evaluating the acquisition of a small or medium-sized business requires careful examination of seller-related factors. Questions should cover seller profiles, reasons for selling, integrity assessment, and details of the transition plan. Other important areas to explore are seller-rolling equity, personal relationships with customers, and the seller's impact on the initial sales process. Seller-related questions are vital due to potential risks in post-close operations and information asymmetry between buyer and seller.
Over many years of evaluating acquisition targets alongside searchers, I’ve found that certain questions tend to apply more often than not. I’ve presented each of these FAQs in today's episode, in hopes that they play a small role in how you structure your own due diligence process, and in turn how you think about the relative merits and risks of the opportunity in question. If you're a buyer, the list that follows can be thought of as a starting point for “Commercial Due Diligence 101”. If you're a seller, you should be prepared to address each of these questions and information requests if you're ever planning to sell your small to medium sized business. Please enjoy!
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