It's The Wrong Question, Stupid

Answer The Investor's Questions, Not Your Own

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Have you ever been frustrated by slimy politicians dodging the real question?

Reporter: So, Mr President, how come you broke your pre-election promise to not raise taxes?
Mr President: I'm glad you asked that, Matthew. The important question is how we improve education in inner-city schools. Let me be very clear on this ...

Vendors too often play that game. They have the lines they believe will impress the investor and they tailor the questions to exploit those pre-prepared answers. 

Wrong move!

Investors are smarter than that. In fact, they find it incredibly frustrating when you answer your own questions instead of the ones they'd like you to answer.

For example, many vendors explain how popular their main search term is. The popularity of the term measured by how often people search for it in Google is, of course, irrelevant. The buyer is more interested in how many unique visitors arrive at the site using that term and how well they convert. Talking about irrelevant factors screams that you are trying to distract the investor from the obvious lack of relevant signals.

With that in mind, here are some of the questions I see sellers answering ... followed by the real questions they should be addressing.

Bad Question To Answer: How easy it is to run this business? (Nobody believes you, they'll form their own opinion during due diligence)

Instead provide information on what human capital/ accumulated business knowledge and experience accompanies the sale. What form is it in? (management team / embedded in smart software / a pdf manual)

Bad Question To Answer: How all/most of your traffic is free traffic from Google (bad business model).

Instead, try these: How resilient is your business to changes in underlying conditions? How sustainable is the model? Is there any real IP underlying the business's core value? What are the key contracts and key relationships you have in place?

Show solidity behind the business plan and operation!

Bad Question To Answer: What a new owner can do with the business / how they can grow the business (this is mildly insulting. Investors can come up with their own ideas. What the investor could possibly do in future is not a selling point, it's demonstrating what you failed to do!)

The investor is more interested in:

- Does the business offer something unique to the market?
- Does it have a sustainable competitive advantage?
- How does this business solve the customer's problem?
- Is there social proof?
- Is it a defensible business model?
- Is the business in a growth market?

Bad Question To Answer: The "potential" of the business (potential is what the investor is paying for but, contrary to what most vendors think, it's not the potential you suggest. It is only that potential the investor discovers for himself)

Concentrate on what you do have rather than on what you don't. Explain the business plan clearly in a way the investor can understand and appreciate. Give the clear impression that the business figures can stand up to careful scrutiny, that someone examining every single penny of revenue, tracing its source and examining its provenance and then taking a fine tooth comb to every penny of expenses and customer acquisition costs ... won't be disappointed.

Other questions the investor might have:

Location and Legal:

Can I run it in my country? Is it legal here?
What is the current ownership structure?
Is it a company being sold or just the assets?
Can the seller confirm that the business complies with all legal requirements in the jurisdictions where it operates?

The business:

Are there any restrictions with the earning programs that would prevent their transfer?
Are all social profiles, pages, accounts and controls going to be transferred? Can they even be separated from the previous owner?
Are the key personnel staying?
Who are the critical / key outside suppliers and will their contracts continue after business transfer?
What are the technical, hosting and bandwidth requirements of the website?
Who will be responsible for smooth transfer of technical assets?
Would there be an easy exit for when I want to divest?

Finance:

Is there any seller financing or loan note?
Is there some other way seller is willing to share risk post-transfer?
How does the seller want to be paid, is it safe?
Are detailed management accounts available? A business plan, with projections?
What currency does the site operate in?
Are all the taxes up-to-date?

About the Seller / Vendor:

Is the seller willing to sign a non-compete?
Why is the seller exiting?
Deals sometimes take a while to thrash out. Does the seller come across as a person with whom I can build a relationship?
To what extent is the site personality based?
What are the seller's other properties? Do they compete with this one?
 

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