As a business owner, it can be very exciting when a potential buyer inquires about your business for sale. This may happen when your business isn’t even on the market. Although there may be many aspiring business owners in the community, many of them will never be business owners. They may not have the skills, expertise, courage or finances to own a business. These are the people who will steal your time.
Before allowing interested buyers to view confidential information about your business, they need to be pre-qualified. Only specific, selected potential buyers should be aware that your business is for sale, so that only those who can be trusted are receiving confidential information about your business.
First, all potential buyers must sign a Non-Disclosure Agreement (“NDA”). This document will require them to agree not to release any private or proprietary information shared with them regarding the business. An NDA is standard practice, and if a buyer refuses to sign one, that should be a warning signal.
In addition to the NDA, we recommend the buyer provide a personal financial statement, a recent credit score, and a summary of the buyer’s business or work background and experience. Since most business purchases are financed through a third party, it is imperative to recognize whether the buyer is qualified to finance the purchase of the business.
In addition, there are certain leading questions that should be asked of a buyer.
What types of businesses is the potential buyer considering buying?
Serious buyers would have done some critical thinking about the type of business they want or, more importantly, don’t want, as well as the size of the business. The size of business may be in terms of revenue, profits, number of staff or selling price. If your business falls outside of their range, this is a potential warning sign that this may not be the right buyer.
How long have they been looking and how many other businesses have they evaluated?
There are professional “want-trepreneurs.” In other words, they look at countless businesses and want to be an entrepreneur but never get around to pulling the trigger and moving forward with a deal. These people can be massive time wasters. Initially they seem like good candidates. They ask all the right questions, however, in reality that’s all they are good at … asking questions!
How soon are they ready to purchase?
If they do not have a time frame, there will be no urgency. They will pressure you for information and then you will be the one left waiting. There is no motivation on the buyer’s end.
Have they made any offers? If not, why? If so, why didn’t the sale close?
When a would-be buyer tells me they have looked at many businesses and have made many offers, but have not moved forward with one, the chances they will ever move forward are very slim. They will usually low ball every offer in an attempt to “steal” the business. Or, the opposite may occur and they never put an offer in because they will always find something wrong with the business.
How much available liquid funds do they have for a down payment?
Yes, this is the sensitive question but at the end of the day, an important one. If they do not have the capital to buy your business you are not going to have a deal, unless you want to finance the deal and take in all the inherent risks. This question is also answered when you receive a personal financial statement from the buyer.
Are they planning to finance the purchase?
Most buyers do not write a check for the full purchase price of a business. Most want to leverage their available down payment and buy the largest business they can. This makes sense, because the larger the business, the larger the cash flow. By determining if the buyer plans on financing the business purchase, a knowledgeable business broker will be able to ascertain, based on the financial and credit information provided, whether the buyer is capable of financing the business purchase.
Does the buyer have any transferable business experience or experience in your industry?
Depending on your business, this question will have different levels of significance. When selling a business, it’s ideal to be realistic about the level of experience required to successfully run your business. If you don’t, you may find this to be a deal killer in the final stages when the buyer has the sudden realization he or she does not have the necessary skills. Knowing upfront the skills a person needs will help you negotiate a better deal. You may, for example, offer an extended transition and training period when negotiating the deal or even invest in additional systems making your business less dependent on these specific skill sets.
There might not be specific right or wrong answers, but the responses, along with the requested financial information, should allow you to determine the level of motivation and qualification of a serious potential buyer. If potential buyers are not willing to provide answers to these questions, you have the right to be very wary. People who are serious about buying a business and those who expect you to share confidential and sensitive information about your business are more likely to oblige. In my experience, over time, answers to these questions become apparent; however, all too often substantial time is wasted on dreamers, tire kickers, or even devious competitors.
As business brokers, we currently get between thirty and forty new buyer inquiries per day. At the end of the day, these thirty to forty buyer inquiries are whittled down to about seven to ten pre-qualified buyers. They have sent back a signed NDA, answered our questions satisfactorily, and provided personal financial and credit information suitable to the business purchase. The critical task of screening and qualifying potential buyers will protect you from unnecessary disclosure of confidential information, the deal falling apart mid-stream, and a lot of wasted time.
Even though you may have many prospective buyers who inquire and express interest in your business for sale, the likelihood is they will not be qualified to purchase the company. A good business broker/intermediary will have the ability and wherewithal to screen buyers. Allowing the broker to pre-screen buyers allows the business owner to continue focusing on growing the business instead of wasting time communicating with unqualified buyers.
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