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I am Selling A Small Business - How Do I Qualify Potential Buyers?



Posted By: Peter Siegel MBA: BizBen Founder, Lead Advisor.   Being prepared when potential buyers contact you about your business for sale is a good idea. Too many sellers (and brokers) are unprepared & miss good opportunities or get involved with unqualified buyers. This Discussion post and answers from ProIntermediaries on BizBen assist with this issue.


Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

I was on the phone today with a seller (ProSell Client) and he asked me this question:

"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?"

In so many words - here was my answer back to him:

Being prepared when potential buyers contact you about the business for sale is a very good idea. Too many sellers are unprepared and miss good opportunities or get involved with unqualified buyers.

The five key questions you should ask are:

1. How much money have you got for a down payment and working capital?
2. What's the value of property or investments you have that can be used as collateral to secure any notes used in seller financing?
3. What's your business experience and does it prepare you to know how to operate my business?
4. Have you made offers on other businesses? If so, why didn't they result in deals?
5. If you're interested in buying my business, are there any other people who will be involved with you?

The answers to these questions will give you a good idea of whether the person has the funds and background to purchase and succeed in the business. You'll also learn if the buyer has realistic expectations about purchasing a business and is motivated, as well as whether there are other decision-makers with whom you'll need to work.

On the first meeting, you want the buyer prospect to sign a non-disclosure agreement. You can get these forms from many publishers of legal documents and find them in law libraries and online. Also, let the buyer know you need a copy of his or her financial statement and resume, if the prospect wants to see any information on the business. In return for information from the buyer, the seller should provide a one- or two-page summary offering basic information about the offering, including a summary of financial information, and some details about the business.

Any buyers who aren't willing to share their financial and work information, or unwilling to sign the non-disclosure declaration, should be crossed off the list of potential buyer prospects.

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I would love to hear more feedback and possible answers to this seller's question from other ProIntermediaries / contributors on this topic. Please reply and comment below - thanks.

As a broker, I like to mainly see from the buyer, a) evidence of funds, b) a statement of assets and liabilities, c) a credit report and FICO score. These 3 things are of importance, because I need to see that they actually have the money to close the transaction, and also I know these are the items a landlord will want to see, so that we can properly transfer the lease. I require these items during the negotiation process of an offer.

If a buyer just comes into my office inquiring about a business, then I have them sign the NDA, and make sure to ask them about their previous business experience, and how long they have been looking for a business. I only send a buyer out on three businesses at a time, too much and the buyer becomes overwhelmed, and I am also cautious when a buyer asks for different types of business listings, such as seeing a restaurant, but also seeing a mailbox store, while also looking at a tanning salon. Most buyers will be looking at businesses within the same category, such as only restaurants, or only bars, etc.

Contributor: Transactional Attorney
Before discussing the business with potential buyers at all have them sign a Non-Disclosure Agreement ("NDA"). An NDA requires them to agree that they won't release any of the information you provide them regarding the business. An NDA is standard practice in any business transaction and you should be wary of any buyer who is unwilling to sign one.

Once the NDA is signed, you'll still want to get core financial and background information before releasing any information on your side. I would advise obtaining a personal financial statement from the principal buyer(s) as well as a business financial statement if they're buying your business under their company name.

It can also be helpful to obtain some key information as to their business purchase status and resources:

What types of businesses are they considering?
How long have they been looking?
How many other businesses have they evaluated?
Have they made any other offers? If not, why haven't they made an offer on another business? If so, why didn't the sale go through?
How much cash do they have for the purchase and for working capital?
Are they planning on obtaining financing? If so, from where, and for what percentage of the purchase price?
What collateral do they plan to use for any financing?
What is their business / employment background, and do they have any experience in your industry?

Depending on the buyer you may want to ask these questions informally in a phone call or email or you may prefer to prepare a more formal buyer questionnaire.
While there are not specific right or wrong answers, the responses should allow you to get a good sense early on who is serious and who isn't.

Disclosing information before you've entered into formal due diligence is a balancing act. On the one hand it's important to provide enough information to a potential buyer to make an educated decision to begin the due diligence process. On the other hand, you don't want to spend time and effort pulling together or revealing too much if a buyer is not serious.

You mentioned that you are taking calls and emails yourself. Selling your business is likely to be one of the largest transactions you'll undertake in your lifetime. If you're uncertain about the sale of your business at any stage, you may want to consider working with an experienced broker or advisor who will understand the proper balance between disclosure and discretion and can help guide you through the transaction from start to finish.

Contributor: Business Appraisals, Valuations Advisor
Questions;

What is your background?
Do you have any experience in my type of business?

How do you plan on funding a business acquisition?

After you give the potential buyers a brief summary of your business tell them you will need them to sign a confidentiality agreement. A simple one page non legal sounding agreement will work.

After you receive the signed agreement you can give them financial statements on your business (3 years) and give them a more information on your business, then ask them to provide you with his financial statement.

If they refuse to sign a confidentiality agreement I would not give them any additional information.

If they balk at the financial statement request they may not have anything prepared so give them some time to comply, but don t give out any more information until they do.

This is basically the method I used for over 23 years in my business brokerage business.



Questions would include: 1) Cash available liquid for down payment purposes? 2) How much Seller financing are you looking for? 3) What's your experience in my industry? 4) Have you ever owned a business and what's your motivation to buy one now? 5) Do you have a due diligence checklist available that you need prior to funding/closing a deal that I can review?

Paperwork - all buyers should execute an NDA/ confidentiality agreement, PERIOD/NON-NEGOTIABLE.

The rest depends on timing and your comfort level with the Buyer. If it's a cash only deal I would request a bank statement for proof of funds prior to accepting an offer. Certainly you don't want to tie up your business with a deadbeat. A 3-bureau credit report & personal financial statement would be advised prior to accepting any offer if I was doing any Seller financing as part of the overall structure.

Contributor: Business Broker - Lliquor Stores, Markets, Hotels, N CA
What question you should ask to potentially prequalify a Buyer: How long has the Buyer been looking and what type business; Is the Buyer experienced in the Business that he is looking at; How much money does the Buyer have for a down payment and how will the balance be paid, via a Bank Loan, a SBA or a Promissory Note; Execute an NDA and then you can share the financial numbers; Bank statement to see if Buyer has available funds; Loans are tricky. Banks look at not just the ratios of the Business but also of the Buyer's living expenses.

In addition, the valuation of the Business may be a very different number from the asking price. A Bank/SBA Lender will take the Buyer's residence(s) or other business(es) as collateral. A Buyer may not have collateral or does not wish to collateralize anything else other than the Business itself; Promissory notes are also tricky, because if the Buyer stops payments then what are the rights of the Seller, also how long will it take through the courts to enforce collection and during this time what happens to the Business.

Contributor: Business Broker - Lliquor Stores, Markets, Hotels, N CA
How long has the buyer been looking and at what type of businesses?

Is the Buyer experienced in the business or industry he is looking at?

How much money does the buyer have for a down payment and how will the balance be paid, via a bank loan, a SBA or a Promissory Note?

Execute a NDA and then you can share the financial numbers.

Review bank statement to see if buyer has funds available.

Loans are tricky. Banks look at not just the ratios of the business but also of the buyer's living expenses. In addition, the valuation of the business may be a very different number from the asking price.

A Bank/SBA Lender will take Buyer's residence(s) or other business(es) as collateral. A buyer may not have collateral or does not wish to collateralize anything else other than the business itself.

Promissory notes are also tricky, because if the Buyer stops payments then what are the rights of the seller?

Also how long will it take through courts to enforce collection? During this time what happens to the business?

There are answers to all these questions but it will take too long to explain and every situation is different.

Thank you for your excellent question.

In preparation for speaking with potential buyers I would recommend that you start with having all of the important information about your business readily available. You might have it in a binder that you can refer to or even show to a perspective buyer. Your income history, net profit, leases and values of your fixtures, equipment, vehicles and an average inventory level are good to have ready. You should also be able to express your opinion of the businesses future and any supporting data that will add to the believability of your claims.

In qualifying a buyer, you should ask them what experience in your field they have, how do they plan on paying for it. Are they qualified and how prepared are they to move forward. If all sounds good you should have them sign a Non Disclosure Agreement. If they do sign this then you might invite them to your business for a viewing and a meeting.

At this point, only if you are comfortable with them, you should go through the book you prepared with them and discuss the business and answer their questions in detail. I would not actually release anything to them at this stage. If they want to take information with them you might want to ask for a Letter of Intent and Deposit that can be placed with escrow and spell out your disclosure requirements very carefully, as it pertains to their having others review your information.

If they are serious and like your business they will go along with this. In the event they do not you might offer to meet with their advisors to go over whatever issues and information they need to aid the buyer. Be open with them and if they feel uncomfortable with the scrutiny remind them that you are sharing sensitive information that could effect you if it ware to become known by others and that you must be cautious.

Good luck with you upcoming transaction.

Two things are essential: a strict, no-nonsense, non-disclosure (confidentiality) agreement, and financial information. We incorporate both elements into one document, and the prospective buyer's willingness to fill out the form indicates the seriousness of their interest in and ability to buy the business.

In addition, you will want to know:

1. What experience do you have in owning or running a business? this particular kind of business?

2. What is your educational and experiential background?

3. Why are you interested in owning a business? this particular business?

4. Who else will be involved in the buying decision?

5. What is your time frame? When do you want to acquire a business?

6. How is your credit? When and how will you have the funds for the purchase?

Answers to these questions will help the seller to prioritize which prospective buyers deserve their time and attention and which ones to avoid. Asking, processing, and assessing these questions is one of the many functions of a professional business broker, helping the business owner concentrate on maintaining and managing the business, rather than being distracted by the complicated process of selling the business.



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