Are Your “Buyers” Really Buyers?
If you’re a business broker – or if you want to become a business broker – you know that there are few ways to waste more time than with “buyers” that will never buy. Over the course of a year, professional business brokers will likely spend an enormous amount of time providing information, answering questions and generally following up with people that will never pull the trigger. This is a bigger problem in the lower end of the market – Main Street businesses – than in the Middle Market, but we’ve found that the issue is common whether the business you’re selling has a value of $300,000 or $3 million.
There are probably dozens of reasons people pose as buyers and never buy but a discussion of these reasons, if one must be had, can be left to psych majors and other theorists with plenty of time on their hands. This post is about not wasting yours.
Millions of people are tired of their jobs – tired of working for someone else – and want desperately to own their own business. But few of these people have properly planned to buy. They’ve not saved enough money; they’ve not discussed a purchase with their banker; they’ve not planned the transition from employee to employer; they’ve not gotten the buy-in from their spouse. So, how do you avoid wasting time with these folks? How can you weed them out and how early in the process can you “back-burner” them? How can you even tell who they are? It’s not easy, especially when you are just starting out.
When you are trying to establish yourself as a professional business broker, you will, in many instances, take any listing. Early on, you’ll want a sale so badly that you will often chase after anyone that has expressed even the slightest interest in one of your listings. However understandable this is, it is also a recipe for wasting your valuable time. You’ve got to know where and with whom your time is most profitably spent.
Controlling your time is even more important if you are a seller trying to sell your business without the assistance of a professional business broker. The more time you spend trying to sell your business, the less time you can spend actually running your business. Not surprisingly, one of the main downsides of trying to sell your business yourself is that there is a good chance that the time spent away from operating your business will result in business growth stalling, revenue sliding and profits decreasing. This is likely to have a negative impact on the value of your business. We’ve posted before and published a podcast on the numerous reasons to use a professional business broker, so there’s no point in elaborating on those other benefits here but the issue of wasting time with people who will never buy is the subject of this post, so let’s continue.
The Process
If you’re a professional business broker, you probably have a process that you follow – one that you’ve established yourself, if you’re an independent, or one that has been established by the broker with whom you are affiliated – any time a lead comes in. In our offices, when we receive a lead for a business we’ve been hired to sell, that lead immediately gets added to our database and tagged and categorized appropriately (so that we can reach out to this lead in the future if we are hired to sell a similar business later on). Once that has been done, we send an Abstract to the lead that gives an overview of the opportunity, along with our Confidentiality and Non-Disclosure Agreement (NDA). The covering email states that, if the potential buyer would like any additional information, we ask them to sign and return the NDA.
(You would think that this would be a very simple, reasonable and unobtrusive request but you’d be surprised at how often a lead will respond with some questions about the business without providing the NDA. This is always a red flag to us. Sometimes the question is simply “what is the address?” But answering that question completely nullifies one of the primary reasons for the confidentiality agreement right out of the box.)
Depending on the business or the requirements of the seller – our client – we may also request a financial statement or some other evidence of the potential buyer’s financial bona fides so that we can see very quickly whether the buyer, based on its financial condition, has even a remote chance of pulling off the deal.
Once we receive the signed NDA and, as the case may be, a financial statement from the potential buyer, we send the Offering Memorandum that we prepared for the business, a 20-30 page detailed description of the business that is designed to answer every question a potential buyer may have (and sometimes even succeeds at this seemingly impossible task!).
How Much Time Should You Spend?
Because the Abstract and Offering Memorandum are both constructed after we get the listing agreement signed but before we bring the business to market, the time we spend constructing both is amortized over the number of leads we receive. Therefore, by the time we’ve received the NDA from any potential buyer and then send the Offering Memorandum, we’ve invested a minimum amount of time on any particular lead. But now is when we have to closely monitor how the lead acts and determine, at every subsequent correspondence, how much additional time they deserve. Our objective at this point is to try to gauge the level of real interest each lead has and, at every step, determine whether or not this lead warrants further time or action.
The first sign we look for is how quickly, if at all, the lead responds to the Offering Memorandum. Remember that if you provide the right information about the opportunity in an easily-read and easily-grasped format, most potential buyers will be able to determine pretty quickly whether the subject business is right for them. If the buyer responds to the Offering Memorandum with additional questions, we feel that we may have a legitimate buyer. If no response comes within a week, we send ONE follow up email asking for confirmation that the lead received the Offering Memorandum and, assuming so, if they have any questions. If there is no response to that email, they are not a buyer and we move on.
If they respond confirming receipt of the Offering Memorandum, assure us of their continued interest and ask a couple of clarification questions, we continue engaging. However, we don’t let more that one week of no response go by before we call or email to see if they have any intent to move further along. Unless we receive a positive response, this is usually our last email to this particular lead. They have not demonstrated the level of interest that we feel is necessary to warrant spending any more time with them.
Experience has taught us that, when we’re faced with tire-kickers, we are likely to be dealing with some very meaningless questions and objections during the process and that we will likely be getting any number of excuses from the alleged buyer as to why they need more information before they can submit an offer or letter of intent to purchase the business. If your marketing pieces – the Abstract and the Offering Memorandum – are constructed properly, most questions that may still exist can easily be addressed during the due diligence period provided for in any properly-constructed contract to purchase. At a certain point, if the potential buyer is unwilling to make an offer for the business, you will know that this is not a “real” buyer and you would be wise to stop wasting your time.
Are There Any Exceptions?
Are there exceptions? Of course! There always are!
If the business you’re trying to sell is valued and priced the way we recommend, it is likely that, if it is marketed properly but does not attract sufficient interest in, say, 60 days, we would chat with the seller about the possibility of dropping the price a bit. If there is significant interest, we would wait 90 to 120 days before having such a chat because “significant interest” should produce one or several offers to purchase in that amount of time and if no offer has been forthcoming, that would suggest that the business, though of interest to a good number of buyers, might be priced a bit high.
A price reduction is always a reason to re-establish contact with pretty much everyone that previously inquired about the business, whether you think they are buyers or not. Circumstances can change for anyone over a three- or four-month period. Granted, you may have to go through the same process and eliminate the same “non-buyers” all over again, but you may find a jewel in there somewhere.
Here’s an example.
One of our offices had a convenience store/truck stop for sale. The marketing brought in about 50 potential buyers, roughly half of which were determined by the broker to be tire-kickers. The business was initially listed at $1.95 million. Though 50 potential buyers represented “significant interest”, there was no offer or letter of intent after four months. The sellers agreed to lower the price to $1.5 million, which was close to what the broker had had established as the Most Probable Selling Price. The broker sent an email to everyone that had inquired about this business notifying them of the price reduction and, within 30 days, one of the so-called “tire-kickers” submitted a letter of intent and subsequently bought the business.
To continue the example, about a year later, another one of our brokers listed for sale a convenience store/tobacco shop in the same state. The Abstract for this new listing was immediately sent to all 50 of the potential buyers, including the “tire-kickers”, of the convenience store that had sold earlier. The broker received two letters of intent from that group and sold the business.
So, to efficiently operate your business brokers practice, one of your jobs is to use your time wisely, recognize when it is being frittered away and stop any bleeding as soon as possible. But your job is also to recognize when circumstances change and when those changes warrant a change in your position. Anybody that contacts you about a business you have listed for sale is, by definition, interested in buying one. It may not be the one they contacted you about and it may not be the right time for them to buy, but by taking the action required to contact you, they have expressed enough basic interest that you should keep them in your database and reach out to them periodically; either when you get a new listing that is similar to the one they contacted you about months or even years earlier, or, if times are slow, simply to stay in touch with them.
If you have any questions or comments, put them in the Comments box, below. I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast. And feel free to email directly at jo*@Wo*******************.com.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
Joe
The author holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at jo*@Wo*******************.com