How do I know if the Seller is really motivated to sell?

One of the first questions a buyer asks themselves when evaluating a business purchase is: How motivated is this seller to exit their business? This is not intended to seek out sellers willing to accept less than fair market value. Buyers are willing to pay fair market value; they just don’t want to spend money or time chasing a deal that will ultimately fail during the sales process.

Deals can fall apart for many reasons: financial discrepancies uncovered during due diligence, deal term renegotiation, underperformance after LOI signing, or a seller’s change of heart. So how do you avoid deals that could fail because of an unprepared or unmotivated seller? Ask yourself: Are they “READY?”

• Responsive to requests
• Engaged in conversations
• Accounting – Their financial house is in order
• Delegating authority
• Yearning desire for activities and interests other than their business

There are endless factors to consider when buying a business, but when you are evaluating the seller’s motivation, start with the acronym READY. Identifying the positive behaviors and/or recognizing red flags up front will help you avoid wasted time with long sales cycles or failed deals.

Responsive – Actions indeed speak louder than words. The business transfer process involves a significant amount of time and energy in sharing information. As a buyer, you want to work with sellers who understand that you need a “reasonably” quick turnaround on information requests. We say “reasonably” because you must realize that they might need some time to pull together the information, and the Seller is still running a business. Responsive sellers not only show motivation but also build trust and respect with you and reduce the risk of “deal fatigue” setting in. Behaviors to look for include: 1) prompt answers to questions and requests for information. If the answer/information is not readily available, the seller should acknowledge your request and provide a timeline for getting back to you. 2) Issue handling – acknowledgment of any issues and addressing them before they turn into larger problems that can jeopardize the deal. 3) Proactively providing information – a seller who is anticipating your requests and providing that information before you ask shows a desire to keep the process moving forward. Red flags include delayed or missed meetings or continuous missed deadlines for deliverables.

Engaged in conversations – Sellers may be quick to provide the reports or information you are looking for, but are they willing to take the time to explain the information and answer questions you may have? Once again, this is about building trust between you and the seller. This is your opportunity to speak with the seller and validate the statements made in any of the marketing material (Confidential Memorandum) provided. Engaged sellers accelerate deal velocity, a measurement of how quickly deals move from first contact to closing. A faster sales process benefits everyone involved in the deal. Red flags include not returning calls, delegating key sales or transition meetings to other staff, and postponing decisions.

Accounting – Is the seller’s financial house in order? Are the financial statements readily available at the end of each month, and are they accurate and transparent? The seller should be able to produce a P&L and a Balance Sheet within a few weeks after the end of each month. The seller should also be able to discuss any trends and anomalies in the financial package. Another strong indicator of motivation to sell is if the seller has taken the time to have a professional, independent valuation done. Having a valuation done shows that this seller has made an upfront investment to lay the foundation for an efficient sale. Red flags include late or nonexistent financial reports/records. Reluctance to share financial information, claims to know the value of the business without performing a proper independent valuation. Statements like – “I only prepare financials once a year for tax purposes.”

Delegating Authority – Has the seller taken the time and steps to transfer key responsibilities to other individuals in the organization, or do they maintain complete control? Has the seller put in place a strong management team to run the business without them? How long has the management team been in place? Have they been in place for over a year and led through any seasonal or perhaps economic downturns? Equally as important as delegating key business activities is seeking an outside advisor to help develop a business exit strategy. Sellers who engage experienced Mergers & Acquisitions professionals understand that the sale of a business involves considerable complexity, and that partnering with a qualified expert enhances the prospects for an efficient, timely transaction. Red flags include unwillingness to turn over control to others; statements such as “I handle all major client relationships,” “I don’t trust anyone to handle this task but myself,” or “I don’t need a business exit strategy plan.”

Yearning desire for activities and interests other than their business – Does the seller show that they are emotionally prepared for life after the sale of their business? It’s crucial to get a sense of this early in the discussions because business owners who lack a clear vision of what they will do after the sale are more likely to change their minds during the sales process. Behaviors to look for: Has the seller discussed what they plan to do after they sell? Are they going to travel? Have they discussed activities/hobbies or future goals, or do they have other business interests or new ventures? Red flags include statements such as “I don’t know what I’m going to do next.” They won’t sign a non-compete clause.

As you can see from the information above, there are many behaviors or statements you can use to help determine the seller’s readiness to sell. The importance of each of these will vary from deal to deal and is specific to the seller. But if you want to increase the likelihood of a successful transaction and limit wasted resources, you need to do your due diligence and make sure the seller is READY to sell.

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