Questions to Ask Before Closing An M&A Deal

July 21, 2022

6 Questions to Ask Before Closing An M&A Deal

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6 Questions to Ask Before Closing An M&A Deal

Unconventional Acquisitions

July 21, 2022

So you’ve found a business you want to buy…

You’ve started your due diligence process

And you think that *maybe* you’ve got a real shot at closing on this deal. 

Congratulations! A big step, buuuuuut let’s slow it down just a touch. 

I see this all the time. You get excited at the prospect of actually buying a business that will turn over big zeros to your bank account, but then…*record scratch* something goes wrong. And not just a little bit wrong. 

Something that could’ve easily been prevented, had you only asked the owner the right questions beforehand, so you could get in a good sniff test. 

Luckily, I pulled together a list of the big questions you should be asking a seller before you close on an M&A deal. In fact, I’d argue that I’d want to know these questions on day one of approaching a current owner about a deal. 

Because if these answers aren’t what you’re looking for…well…there may not even be a point in writing a letter of intent. So, let’s get into it. 

Here are the key questions you’ll want to ask your seller before closing on that business you’re about to buy:

1. Why are you selling this business? 

Alright, friends…This one’s easily the most important question to ask your seller, arguably even before you ever approach the first negotiation or start doing your true due diligence. 

In fact, the way they answer question number one will be the deciding factor as to how the rest of the chips fall and how you decide to approach your deal. Listen up, and be prepared to read between the lines and ask follow-up questions so you can get to the root of what’s been going on. 

Some green flags to look for when talking to a potential seller include things like:

  • Approaching retirement age
  • Looking to move or relocate
  • Burnt out, disengaged, or mentally checked out from the business
  • Not interested in handing the business over to a family member
  • No named successor or business partner to pass the torch

And a few red flags we see from sellers are:

  • Their customer base is drying up
  • New rules and regulations are passed that stifle business growth
  • Increased competition in the market
  • Inability to innovate or update the idea

It’s also always safe to assume that there might be some answers to this question that the business owner probably isn’t willing to bring up, at least during your initial conversation. 

Just be sure to have your eyes peeled for other things that may not pass your initial sniff test if you decide to move on, but as always, proceed with caution. 

2. How are you currently being compensated by your business?

This is another important question to get cleared up right from the beginning. If a business owner and their family aren’t able to make a reasonable living from the cash flow from the business, then it’s probably not a business worth buying, either. 

You’ll also want to get an idea of how the business owner has been paying themselves. A few additional questions you could ask:

  • Are you currently set up as an LLC? S-Corp?
  • Are you currently paying yourself via payroll?
  • How often are you performing cash withdrawals from the business to pay yourself?
  • What additional company resources and assets (i.e. work truck, office space, etc.) do you also have access to? 

3. Do you have immediate cash flow?

Hot take here…but if you (the buyer) are interested in buying profits, you’ll want to make sure that their revenue is currently flowing consistently. I mean…how much would it suck to buy a business that turned $0 in profit on the day they handed over the keys to you? I think I’ll pass. 

Some important things to ask about here:

  • What are your monthly operating expenses? 
  • What’s the average value of a customer transaction?
  • Is there any recurring revenue or subscription-based services? How much? 
  • What does the cash flow forecast look like? 
  • Are there more/less profitable seasons? 
  • What’s the average revenue during a high/low season? 

Make sure to ask and get a good explanation on any of these numbers from your seller, but also do the work to verify these claims! You do NOT want to get hung up on something that could have easily been fact-checked. 

4. What are some of your biggest business challenges right now?

Don’t go asking this one on day one and first thing in the morning. I personally recommend having this convo over a beer that’s outside of the place of business—get a little fresh air. 

This will also be one of the most valuable questions you’ll ask, and yet it has nothing to do with numbers. 

Understanding the current challenges in the business will help you get a better idea of what you’re about to be up against. 

I always try to ask questions like:

  • What frustrates you the most about the current state of the business?
  • What do you think are the biggest weaknesses in your business today?
  • What are the biggest potential opportunities for the business? 
  • What have you hated spending your time on in the past?

5. What are your most valuable business resources?

This is an important question to ask, because some of the most valuable assets and resources in the business may be things that aren’t up for grabs in the event of a sale. Best to check on this early on if you ask me. 

Some of the most common resources are things like…

  • Skilled labor or specially trained employees
  • Key leaders or team managers
  • Vendors
  • SOPs
  • Equipment

You should also check in on any special certifications or designations that qualify the business owner for deals reserved for small businesses, minorities, women, disabled veterans, etc.

6. Can you walk me through your current customer list?

If it were me, I’d also want to get a general idea of what the seller’s current customers list looks like. There are advantages and disadvantages to all types of customer dynamics, and you’ll want a general overview of how the business is pulling together its revenue each month. 

A few characteristics I’d want to know are…

  • % of B2B vs. B2C
  • Recurring vs. transactional monthly revenue 
  • Customer acquisition cost (CAC)
  • Loan-to-value ratio (LTV)

Want to spend LESS time chasing down bad deals and MORE time actually enjoying buying businesses in the boring? We’ll help you figure out which type of business to buy next, plus how to make your process smooth and streamlined, in our online course for small business buyers

…or if you’re really serious about investing in small businesses, you should probably head over and join our mastermind

Yours Unconventionally,

Codie & Ryan

Co-founders – Unconventional Acquisitions

If you want to learn more about how to find and buy businesses, check out these articles👇

You can also register for the course here OR if you are serious about buying a small business, join our mastermind.

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