I am selling my business and have started to receive phone calls and emails from potential buyers. What questions (please list them all) should I ask them to prequalify them and make sure they're a viable candidate to buy my business? Also - are there any other items (paperwork) I should get from them before showing them my business and financial information?
One of the hardest parts of selling a business is knowing how to deal with people who‘ve responded to your business-for-sale ads. Most likely, eight to nine out of ten of the people who call will either have no interest, or will not be qualified to make the purchase, either because they don’t have the financial ability or they lack the experience to take over and successfully operate the business. The way to address this issue is to require that anyone interested in your offering should provide a financial statement and resume before you even let them know the identify of the company for sale. Your request for this information is an effective way to help you qualify prospects. It’s usually best to simply request this information in a written form rather than ask the individual how much money he or she is working with and how much pertinent experience would be brought to operating the company. If a buyer-candidate is unwilling to furnish this information, it’s a good bet that he or she is not qualified.
The other thing a seller wants from a prospective buyer is a signed non-disclosure agreement. It’s a form you may be able to find and download from the Internet or purchase from a legal contracts publisher. It says, in effect, that the buyer will not share proprietary information about your business with anyone else, and that the buyer understands there may be a legal consequence for not abiding by that promise, because you could be damaged if private information - including the fact the business is for sale - is shared with other people.
Once you’ve spent a total of two or three hours talking about the business with a prospective buyer. it’s time for you to receive a letter of intent or an actual offer to purchase. Someone who wants to talk about the company in more detail, taking up more of your time, without offering to purchase it, is unlikely to be a serious buyer.
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The first thing you should ask for from each potential buyer is a signed confidentiality agreement (simple one page) before giving them any information on your business. It should also include the fact that your business is for sale is also confidential. At sometime early in the process if the buyers seems interested in your business ask to see their resume and a personal financial statement. You will then be more comfortable providing them with more in-depth financial data. You definitely should know the Market Value of your business and getting a business appraisal would be a wise choice. You don’t want to miss getting top dollar for your business by not knowing its true value.
Buyers are strongly attracted to businesses that look good. The same principles apply that apply to selling a home or even a used car. If it shows well it will sell and sell at a high price. For the best results, the business must look exceptionally clean, bright and organized. Cleaning, painting (including equipment), carpeting and replacing worn items will greatly improve the success of the sale. Having looked at your business everyday, find a family member or someone you feel comfortable with who will give you an independent evaluation of the visual appearance of your business.
Another factor is the look of success. I remember one business I sold, where the owner had Tiffany lamps, exotic wood paneling, and very elegant furniture in his office. I sensed that each prospective buyer I brought in pictured himself in that office having the same success that the seller had. Of course this was partly a façade but it worked and most buyers judged the business to be very successful when in fact it was not unusually better than any other business. Every potential buyer will picture himself in your business and if it fits the image he has for himself, he will proceed toward buying the business. If the image does not fit, he will walk away even from an excellent business.
How you react to the buyers is also very critical. To be successful you must be friendly and very open. Concentrate on the good aspects of your business but no matter what the buyers may ask, answer their questions honestly. Never, with out being asked, bring up the faults of your business and dwell on them. I have found that the problems you may have with your business are not the same problems a new owner would have so don’t discourage them over issues they may not face. You will probably be asked a number of questions which you may feel are not very good questions but answer them as you would answer any other question. Remember that the buyers do not have the same knowledge of the business that you do and a straightforward answer from you even to a dumb question will certainly help them.
Try not to go far beyond answering the questions posed to you. If the buyers are not satisfied with the completeness of your answer, they will usually ask another question about the subject until they are satisfied with your answer. In other words, do not drag on with endless answers to simple questions. Make sure that you ask questions of the buyers, as selling your business will create a long-term relationship with them and you have to feel comfortable with that relationship.
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My specialty is selling and leasing restaurants and bars so my answer is predicated upon that experience but I think my answer can apply to any business. The first thing you want to do is have the potential buyer sign a confidentiality agreement or NDA (non disclosure agreement). I use one that I have prepared but you can probably find one online. I would do this before you provide any information.
Next to qualify the buyer you want to know the following:
* Reason for interest
* Current location
* Financial status
You want to determine if the buyer will be a good fit for the business. The key area of interest is the financial status. I do not require documentation at this point in the discussions but asking detailed questions regarding available funds, financial background, other sources of income, etc. is helpful.You don't want to waste your time or the time of the buyer. I hope this is helpful.
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This is a very good question. An owner contacted me a couple of years ago who was trying to sell his business on his own and had numerous meetings with a buyer over a 2 month period, shared business financials without getting an offer. When I got the Buyer to complete the Buyer Profile, we figured out that he didn't have sufficient funds. Many owners have run into Buyers who ask and receive extensive information from the owner only to find out later that they either don’t have the money or can't make a decision in the near future.
Let me describe how brokers would pre-screen buyers and how and when information is released to the buyers. Then I will discuss what you should do. When broker advertises a business there is no identifying information in it, so the potential Buyers do not know which business is for sale.
They would be required to sign a confidentiality agreement (requiring them to maintain confidentially of all information provided to them including the fact that the business is for sale) and also asked to complete a Buyer Profile. Buyer Profile would ask about their background, qualifications, expertise, licenses, interests, geographic area, amount available to invest in the purchase, annual cash flow needed to replace their current occupation, a brief financial statement showing net worth, and questions regarding their credit, pending litigations, past history of bankruptcy, etc. This information can then be used to pre-screen buyers. Some examples of mismatch are that the qualifications don’t match, business doesn’t make enough money to replace their current occupation, they don’t have or can’t acquire the required licenses, business is outside their geographic area that they are willing to commute to, or they don’t have sufficient funds to purchase the business. Most brokers would have the business pre-qualified for an SBA loan if it would qualify.
In that case, Buyer needs to have enough money to come up with the required down payment, have the right qualifications, and collateral if available. Otherwise, Buyer needs to have sufficient money to buy the business outright (minus any Seller carry loan that you are willing to extend). If they have bad credit, history of bankruptcy, or litigation, you would need to discuss that at length and get comfortable that you still wish to proceed. Broker would normally prepare a confidential business profile that summarizes the highlights of the business, opportunity for growth and any significant challenges. A financials summary of the business is also included indicating what a full time working owner would make in a year. Those buyers that pass the initial screening will receive this Business Profile and after a meeting with the owner would be expected to make an offer that is contingent on Due Diligence.
Only when an offer has been accepted and a deposit check deposited in Escrow would the owner open up the books and share the Tax Returns, detailed Profit & Loss Statements, customer and vendor information, and employee information. Buyer would then have the opportunity to verify that the business indeed makes the money that it was advertised to make.
Summarizing the above discussion for your case, I would definitely have them sign a confidentiality agreement, and get them to answer the questions from the Buyer Profile described above.
Then review the profile with the Buyer to discuss any mismatch. If that is OK, then proceed with discussing the opportunity, the amount of money it makes and then ask them to make an offer with a deposit check subject to Due Diligence. Only when the offer is accepted would you open up and show them the detailed information.
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Pre-qualifying someone for buying a business is much the same as for a home. Depending on how you have listed your business for sale, that is, are you are offering financing, do you expect all cash, is financing going to be available for your business, your questions and concerns will be a bit different. In any event, the first thing your potential buyers should prove to you is that they have cash to make the purchase. Whether that is for down payment or to cash the purchase out. Serious buyers should be willing give you pre-qualification letters from lenders and/or proof of funds from wherever the funds are. Remember, they will also have to qualify to purchase or lease the facility in which the business operates.
If the facility requires certain kinds of City, Count, or State licensing with strict requirements, you should also get a pretty good idea from interested parties that they are qualified to operate the business, as obtaining the proper licensing will usually be a contingency of any purchase agreement. You won't want to waste everyone's time and efforts working with a buyer that won't be able to qualify to operate your business because those requirements are not going to be met.
Just a word of clarification, when I say that the first thing you should do is to obtain proof of funds from your potential buyers, I mean that is the first thing to do after someone expresses serious interest by requesting to see your financial records and other data. Try to be as cordial as you can with buyers, but it is important to understand that buying a business is a two-way qualification process. Your business must prove itself to your buyer, and your buyer must do the same for you.
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