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

Comments & Replies: 9     Views: 1347     Posted By: Peter Siegel MBA  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.

Topics: Selling A Business     Tags: for sale by owner, selling a business



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.

-------------------------------------------------------------

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.


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.


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.

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.

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.


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 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.



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.

Replies To This Comment
Mark's last paragraph is extremely important to the business seller. You (the business owner) are expert at what you do -- as business brokers, we are expert at what we do. Too often, I have seen the once-successful thriving business losing momentum and value because the business owner re-directs his time and attention from running the business to trying to sell it.

The best answer to "How does the business seller qualify potential buyers?" is: You don't! Leave it to the professional business broker and concentrate on maintaining -- and growing -- the value of your business until the buyer's funds arrive in your bank account.



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.


  Helpful Resources To Assist In Selling And Buying California Businesses
Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services In California

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Brad Steinberg, Business Broker: Laundromat Specialist

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

William F. Ziprick, Attorney: Legal Services For Buyers And Sellers

Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

Helen Yoo at New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
Valuing A Business - Do You Add The Inventory Amount To The Price Or Not?

A business buyer asks how to handle the inventory amount in the purchase price of a business. Do you add the inventory value to the business value? Peter Siegel, MBA (ProBuy & ProSell Program Advisor - Lead Facilitator ) answers this question with the BizBen Network of advisors and resources.

5 Myths About Selling A California Business: Best Tips For Sellers & Brokers

Peter Siegel, MBA (at 925-785-3118) - BizBen Director discusses myths associated with the process of selling a business and some of them can actually cause deals to fall through. Don't let your sale be comprised, be aware of these common misconceptions related to the process of selling a business.

Selling My Small Business: What Items Should I Have Ready To Be Successful?

When selling a small to mid-sized business, owners should have their paperwork and financial information ready to go! They should also have a short business plan of past history, current operations, and potential for the future. In this BizBen Discussion several advisors and intermediaries weigh in.

Computing All Add Backs: Defining Adjusted Net Income When Buying A Business

The use of add backs & adjusted net income is common among sellers of businesses when showing their financial information/performance. But buyers are cautioned to review financials and tax returns/documents closely. Peter Siegel, MBA with BizBen (ProBuy & ProSell Advisor, Lead Facilitator) explains.

Absentee Run Small Businesses - Is That Really A Possibility For Buyers?

Is buying a absentee run small business really a possibility? Peter Siegel (BizBen ProBuy Director) gets asked this question a lot in his consulting sessions with business buyers. Read more about what other Advisors and Intermediaries feel about this topic on this popular BizBen Discussion!

8 Items Buyers Of Small Businesses Find Critical When Reviewing A Business

In this month's Business Buyer survey for BizBen.com, we asked participants in our ProBuy Program and 250 other random business buyers what they look for and avoid when looking at a business for sale postings online. Of the 20 potential posting characteristics we asked about, 8 stood out.

Buyer Asks: Seller Doesn't Have Recent Financial Figures: What Should I Do?

The owner selling the business doesn't have recent financial information or documentation but insists revenues are increasing. Should buyers believe the seller? What should buyers do in this situation? ProIntermediaries on BizBen answer the question of verifying seller / owner's financial claims.

Find Out Why 80% Of California Business Buyers Never Find And Buy A Business

First the dreaded statistic: 80% of all CA business buyers looking to buy a business in California never end up doing so! Peter Siegel, MBA BizBen.com Founder & ProBuy Director) covers successful tactics & strategies all business buyers of California small to mid-sized businesses should utilize now.


Tim Cunha Business Brokerage
Chuck Post Laundromat Industry Expert
Escrow Services Diane Boudreau-Tschetter
HVAC Business For Sale Central Valley
Facebook
Twitter
Linkedin
Vlogs and Podcasts
BizBen ProBuy Program
California Educational Events Buying And Selling Businesses
Business For Sale California Stats
New Postings Reports On BizBen Sign Up
BizBen Blogs And Articles
BizBen ProSell Program


BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #364 Dublin, CA 94568 © 1994 - 2021, All Rights Reserved


New Info Daily:   Facebook   Twitter   Linkedin   Vlogs and Podcasts



500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
How to Sell Your Small Business: Tips For Selling Your California Busine...
Read More News
Need Financing To Buy A Small Business? Business Purchase Financing Deta...
Read More News