Preparing to sell your business: what a buyer will question

Most owners start thinking about a sale with the price. Buyers start with the risks: anything in the numbers that might make the business worth less than it looks, or might not survive the change of owner. Their questions are predictable, which means you can answer most of them before anyone asks.

This post walks through what a buyer will question in your figures, the paperwork they will ask for, and what you can still fix in the year before you sell.

Start a year or two before you sell

Many of the things a buyer checks take time to change. A track record is built one month at a time. A customer who brings in half your revenue cannot be replaced in a quarter. A business that runs through you needs time to learn to run without you.

Starting twelve to twenty-four months before a sale gives you time to fix what you find instead of explaining it across the table. It also gives you a year of figures that show the fix worked.

What a buyer will question

How long a track record you have

A buyer wants several years of monthly figures, not one good year; three years is the usual ask. They will look for months that were never closed, figures that were changed later, and gaps where the books were caught up in a rush at tax time. A short or patchy record does not stop a sale, but it widens the range of what a buyer thinks the business might really earn, and buyers price that uncertainty against you.

What the business really earns

Buyers rebuild your earnings to show what the business would make for a new owner. For a business the buyer will run themselves, that is seller’s discretionary earnings (SDE): pre-tax profit with the owner’s salary and benefits, interest, depreciation and one-off or personal costs added back. For a business that will need a manager, it is adjusted EBITDA, which adds back the same items but takes off a market salary for the owner’s job. Our valuation post works through both with a café’s figures.

Every add-back needs evidence. The owner’s salary is easy. Personal costs run through the business are common and can be added back when they are documented. A “one-off” that shows up every year is not a one-off, and a buyer will take it back out.

Whether profit turns into cash

A business can report a profit and still not produce cash: customers pay late, stock piles up, or money goes out on things that never reach the profit and loss statement. Buyers set the profit beside the cash the business actually generated over the same months. As a rule of thumb, if less than about four fifths of the earnings turned into cash, expect a buyer to ask where the rest went, and the answer had better be in the figures.

Whether the margins hold

A gross margin that swings from month to month makes next year hard to predict. A buyer will look for the reason behind each swing: a change of supplier, discounting, a shift in what sells. Margins that hold steady, or move for reasons you can show, support a better price.

How much depends on one customer

If your largest customer brings in a large share of revenue, a buyer has to ask what happens if that customer leaves after the sale. As a rough US rule, buyers start to price that risk in once one customer passes about a tenth of revenue, and beyond about a quarter it shapes the deal. The usual answers cost you: a lower price, part of the price paid later only if the customer stays, or a request that you sign the customer to a contract first.

How much the business leans on you

If you are the person every customer calls, the only one who knows the suppliers and the one who makes every decision, a buyer is not sure what they are buying. They may ask you to stay on for a year or more, tie part of the price to future results, or simply pay less. Part of the answer is in the figures: what it would cost to hire a manager to do your job, which comes off the earnings in adjusted EBITDA.

The paperwork a buyer will ask for

A buyer, or the buyer’s accountant, will ask for most of the following. Gathering it early saves weeks later and shows the business is run with care.

• Monthly profit and loss statements and balance sheets for the last three years, and the current year to date.
• Business tax returns for the same years, which should match the statements.
• Bank statements, so the figures can be checked against the cash.
• A list of add-backs, each with its evidence.
• The lease, and any other contracts that would pass to a new owner: suppliers, customers, equipment finance.
• Payroll records and a list of staff with their roles, pay and start dates.
• Licenses and permits the business needs to operate.
• A list of equipment and stock, with rough values.

What you can fix in a year

• Close every month, within a couple of weeks of month end, and keep doing it. Twelve clean months in a row is itself evidence.
• Separate personal and business spending, and document the add-backs you already have.
• Chase late payers and clear old stock, so profit turns into cash and the balance sheet shows it.
• Widen the customer base, or sign the largest customer to a contract that would pass to a buyer.
• Step back from the daily running. Write down how things are done, hand relationships to staff, and let a manager run part of the business while you are still there to help.
• Put the paperwork in one place before anyone asks for it.
• Find someone who has sold a business like yours: a broker, an adviser or a lawyer. Getting the numbers ready is work you can do yourself. Pricing, finding the buyer and the contract need someone who does deals.

Ready is not a price

Being ready to sell does not tell you what the business will sell for. It tells you that when a buyer asks a question, you will have an answer with evidence behind it, and that fewer of their questions will turn into reasons to pay less. The price still depends on the buyer, the market and the terms.

Replafin’s Ready to sell page runs these checks on your recorded months and scores them out of 100: how many months of figures you have and how many came from your books, bank or a file; your earnings over the last twelve months as SDE and adjusted EBITDA; how much of those earnings turned into cash; and how steady the gross margin has been. It asks the four things only you can answer (your add-backs, what a manager would cost, your biggest customer’s share of sales, and whether the business could run for a month without you), keeps the paperwork checklist, and puts the three things to fix first at the top.

Its thresholds follow common US practice for selling a small business. They are starting points, not advice, and the score says how ready your numbers are, not what the business will sell for. For that, start with how to value a small business.