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Qualifying Business Buyers: Lee Petsas Discusses Strategies

Contributed by Lee Petsas

A small busines owner recently asked the question on the BizBen blog, "how do I qualify potential business buyers to see if they are truely interested in buying my business?" To completely answer this question I need to know what type of business it is, the asking price and any special goals the Seller is trying to achieve. I have had cases where the Seller wanted to make sure all employees were retained, treated well, and the Buyer would not relocate the business. So the Seller was very concerned about who bought the business. We interviewed numberous Buyers and this Seller “hand picked” the final buyer to meet her needs as we had multiple Buyers for this business. I have had others where all the Seller only cared about was the sales price and cash received at the end of the sale. Every case is unique in Business Sales.

In all business sales I will give a very little general information to the buyer without disclosing the specific business and then ask the following questions to each buyer up front in my first phone conversation.

1. Do you have any experience in this type of business? If they say yes, I want to dwell deeper in that subject. Where, when, how long. I want specifics. If it was local, I will know that company or will be able to research to see if they are telling me the truth or giving me a line. I want to know if the Buyer is “REAL”. In all my line of questioning I am trying to determine if I want to spend my time with this Buyer.

2. The second question I ask is; How much liquid cash do you have on hand today? Can the Buyer afford my business? Many initial inquires will not be realistic feasible Buyers. I know how much money it will take to complete the sale, how much money, if any can be borrowed against the business. Why would I even want to give a Buyer the name and address of my business if they can’t afford it?

3. In line with the cash down payment, there might be other liquidities a Buyer has to purchase a specific business. Stocks, equities, 401k, etc. Depending on the purchase price (large, small), and the Sellers desires, in many larger transactions, I will ask the buyer for proof of funds before disclosing specific information on my business. A real Buyer will not have a problem with this. Buyers who are dreamers and fakes will fight you on this. Real Buyers who have the money they say they have will not be afraid to prove it to you if the business interests them.

4. Non Disclosure Agreement. After I am satisfied the buyer is real and if the Buyer wants to see my business, I want him to sign a Non Disclosure Agreement. During this part it is important to tell the Buyer to be very discrete when viewing my business. Do NOT talk to my employees or customers. If you have any questions come ONLY to me.

Again remember you need to give the Buyer just enough info on your business to get their attention before you can pull the facts out of the Buyer. Do yourself a favor and hire an experience Business Broker to handle this for you. It is a process to qualify Buyers. You can’t successfully run your business and do this competently at the same time

About The Author: Lee Petsas has been selling businesses with UBI Business Brokers in Southern California since 1981. In 1999 he became the Owner and Broker for UBI. He is still active daily in Listing and Selling businesses. He has been approved multiple times by Courts as an Expert Witness in the area of Business Valuations. UBI has been in Southern California selling businesses since 1965. You can reach Lee direct at 714-363-0440.

Posted on May 7, 2010 | Email This Blog Post | Print This Blog Post | All Contributions From Lee Petsas

Categories: BizBen Blog Contributor, Buying A Business, Deal And Escrow Issues, How To Buy A Business

Comments:

Great article and very valid points. Because I work with mainly with Food franchises (SUBWAY and others) I have to screen and prequalify all buyers for the seller, Franchisor, and the banks, otherwise it really is a waste of time for all parties. I am surprised as to how many Franchisees actually give out important information to so many unqualified buyers only to be disappointed that buyers did not move forward or failed to qualify with the franchisor. I will ask some basic information, as above, and for a signed NDA. Prequalifying and screening buyers is essential if you want the broker to call back and take you seriously. Buyers please take note that you are entering a secured area, so to gain access you will need to identify yourself, show your credentials and be scanned before being allowed entry!

Posted by: Fayaz Karim

I agree it's generally good advice to qualify buyers and not waste time with people you don't think are qualified. But if you look at Peter Siegel's blog today, he says that sellers can make mistakes about who is and who is not qualified and can "blow off" someone who has the interest and the ability to buy the business. I don't think the two ideas are really in conflict that much. But it points out that this isn't an exact science. I guess if someone doesn't have enough money there is no point in wasting time with that buyer. But if there's someone you're not sure about, maybe it's better to give them the benefit of the doubt and at least answer their questions, instead of not returning their phone calls and not helping them understand the business. Maybe that person will wind up being your buyer.

Posted by: Steve C.

I think it's okay for a seller to ask for references from a prospect to verify the financial ability. But not everybody agrees with that. At least get a letter from an officer of the bank where the person has a deposit, or the broker who handles the buyer's investments. They don't have to give out detailed information. It will change from day to day anyway. But the letter could say that as of a certain date, so and so had investments with a value in the mid-five figures. It's not an unreasonable request because that is what the seller does by showing balance sheet and P & L prepared by a third party (the accountant).

Posted by: Louis Tek

It also is a good idea to find out if the buyer has made an offer or other offers on businesses and what happened that no deal went through. It might be the case that buyer is trying to "steal" a business--making low-ball offers in hopes someone will agree. If so, the seller should know about that and disqualify that buyer.

Posted by: Chaz A.

You tell the important reason why sellers should hire broker to help them sell. It can be a big problem for inexperienced seller to qualify buyers. At the end they waste time with not serious buyers. And maybe they don't work with the one person who comes and is interested and has the money.

Posted by: Mr. Shin

This pretty well sums up the most important things to do in dealing with a prospective buyer. It's amazing how poorly most sellers understand the process. Either they are too intimidated to ask the key questions, because they're afraid it will scare away a buyer, or else they are so cautious, and don't really know how to interview a buyer, that they don't ever get the process started with a real buyer because they don't give out the information that business buyers want in order to determine if the business is of interest.

Posted by: Alex Max