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We want both buyers and sellers to be open and honest during every meeting they have, whether those meetings are virtual or in-person. But it’s important for buyers to know that sellers don’t always have all the answers or may sometimes respond in an unexpected way. As a buyer, you want to check the tendency to react and instead try to look at interactions in context.
Not Knowing Numbers
There are sellers who know their numbers cold. These are the sorts of people who looked at current financial reports each month when they were running their business and it’s the same now when they are selling their business. But trust us, most business owners, even those who have great businesses, don’t necessarily know their numbers cold. Don’t take that as a knock if they don’t know a number or even a good range of a number off the top of their heads when you ask.
This is even more so the case for add-backs and cash flow. As advisers it’s our job to encourage professional valuations and then to explain to buyers why those valuations make sense, which add-backs were created, and why the projected cash flow for the buyer may be different from what the seller is experiencing now. We also may not know the numbers off the top of our heads (we are reviewing many valuations in any given week), but if you give us time, we will always be able to answer why a number is stated as such or why we think a given multiple is justified.
In practice: treat sellers as humans. They forget things and don’t always know the answers on the spot. It doesn’t mean they don’t know the answer if you give them time and access to their financials and records.
Not Knowing Fundamentals
In addition to not knowing numbers, sometimes sellers don’t know what would be considered some basic fundamentals of how their business is profitable.
Recently, we heard about a buyer/seller meeting for an accounting practice. The buyer is rolling up smaller practices and is favorably disposed to buying the business just looking at the financial reports. But in order to get context, he asked these questions at their meeting:
- What’s a rough estimate of your client breakdown. i.e. business vs personal tax returns?
- Why do you use the tax software you do? Have you considered alternatives?
- Why have you kept your prices the same the last three years despite taking on more clients?
The seller was visibly flustered, and the buyer, wary of scaring her, told her not to worry, that they could look at these questions together at the next meeting. Afterwards, he shared his thoughts, being in the same industry himself: “It’s pretty typical for most owner/operator CPA businesses to not focus on their business, but to busy themselves in the business. Hence, they just get in elbows-deep with the work and don’t think about who their clients are (“business vs. personal”) or alternative software (“this one works fine for me and my clients thank you very much”) or the necessity of raising prices over time (“if it ain’t broke, don’t fix it”).”
He didn’t punish the seller for spending years working in her business instead of on her business. Indeed, he was happy about all the money and opportunity she had left on the table, which could be his if the sale closed.
In practice: don’t treat buying a business like a cutthroat job interview where a candidate is being judged each step of the way. A business transaction is more complicated and nuanced.
Feeling (and Acting) Emotionally
We say all the time in these articles, in our podcasts, in our face-to-face meetings, a business transaction is highly emotional. Both buyers and sellers will have skin in the game, but it is the seller who will often be more emotional, and should be given more benefit of the doubt and leeway (within reason). We’ve seen situations in which sellers get really emotional when asked why they want to sell. We’ve also seen buyers get upset when sellers ask for more financial paperwork when some form of seller financing is involved. In the first situation, sometimes a seller doesn’t want to sell, but was forced to by a health event or by circumstances, so is still working through the emotional challenge of letting go. In the second situation, a buyer is missing the fact that when a person becomes, in effect, your banker (which is what happens in seller financing) it’s entirely reasonable for them to do bank-like activities, like asking for more paperwork.
Both buyers and sellers have to be aware that emotions are always an integral part of every business transaction. Successful buyers and sellers don’t pretend emotions don’t matter, or even suppress them. Instead, they acknowledge that they exist (and play a key role) and give grace, time, and space for those emotions to play their own (necessary) parts in the process.
In practice: business transactions are emotional. Don’t let your emotions get in the way of a business transaction.
Looking to sell a business and want to be better prepared for your own first buyer/seller meetings? Give us a call today.