Selling a Business: Tire KickersWhether you’re a business broker or business owner, when selling a business tire-kickers can waste a lot of your precious time. Selling a business can be a time-suck under any circumstances and no one wants to have their time wasted by people that are, if anything, window-shopping. That, of course, is one of the three main reasons to engage a professional business broker, someone who can weed out the buyers who might show interest but lack the necessary skill set run the business or the funds to purchase it. If the highest value is to be realized, the process of selling a business is both specific and complex. In its own way, it is like any other area of expertise – healthcare, law, architecture, rocket science. You’ve got to know how to do it, to do it successfully. Whether you’re a business broker or business owner that is considering selling your business yourself, you have to know what to look for in a serious buyer – and how to separate the wheat from the chafe during the courting process. What follows is a list of buyer attributes that any good business broker will scrutinize.
Previous Business HistoryYou’ve got to get to know the buyer. What’s the buyer’s background? Do they have business experience? Have they owned a business previously? Most “real” potential buyers will understand why you ask these questions and willingly provide the answers. This is one of the first things a professional business broker will ask a buyer. In case the buyer has no previous history of owning a business from your industry, you should ask why they want to buy your business (or the one you represent) and what makes them think that they can run it successfully after acquiring it. From the answers you get, you should be able to tell fairly quickly whether or not this buyer is “real”.
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If a potential buyer claims to have – or represent – a company with similar operations to what you’re selling and is interested in a strategic acquisition, get online to research the firm the buyer claims to own or represent. Get some sense of that company’s background and market reputation. Try to determine whether a marriage of the two businesses makes any sense on its face. Of course, it may not be possible to divine what the buying company has in mind but the more background you have the easier it will be to advise your client, the seller.
The Buyer’s Financial CapabilitiesNeedless to say, among the most important aspects of a buyer is whether or not they have the financial wherewithal to actually buy the business you’re selling. Asking the buyer about his or her financial capabilities is something you should do before you start the process of negotiation. When shopping for a business, most people will have a budget – a range or “not-to-exceed” number – for the purchase. Find our how much the buyer plans to put up as a down payment and how he or she plans to finance the remaining amount. Before providing any trade secrets or proprietary information of the business you’re selling, you should request a buyer’s personal financial statement so that you and your client have an idea of the buyer’s financial assets and liabilities. What you want to do is to verify their financial qualification to buy the business. Serious buyers would not only have an adequate amount to cover the down payment, but they would also have enough working capital to cover the operational costs for a reasonable period of time. Though we work with businesses with transaction values of between $100,000 and $20 million, our sweet spot is the $250,000 to $5 million range, or so. In that market, some amount of seller financing is a common component of a sale. If that’s the case, your discussion should turn to the details of the financing they’ll want the seller to provide such as the amount, the term, any risks the seller would have to assume, the length of the transition period during which the seller would serve in a consulting capacity.
The Buyer’s Knowledge of the Acquisition ProcessWe’ve found that many buyers don’t have any idea of how the process of an acquisition unfolds. In fact, many relate it to the process of buying a home. It’s anything but. Serious buyers will know the drill; what due diligence means, the importance of existing personnel and organizational structure; the personal aspect that will surely be part of the decision-making process of the seller. They’ll have various methods of evaluating a business. If you’ve done the valuation correctly and produced a comprehensive valuation report (as we teach in our course); if you’ve crafted a compete and thorough Offering Memorandum (similar to the one we provide in our course), knowledgeable buyers will have few questions as to the value of the business from the seller’s standpoint. The remaining issues will be related to the buyer; location, satisfactory ROI and the like. _____________________________________________________________________________
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Buyer’s QuestionsOnce the appropriate non-disclosure documents are signed and the identity of your client’s business is disclosed, serious buyers will conduct some research about company as part of its early and basic due diligence. But whatever they learn independently, they’ll have additional questions related to the operations of the company for the last few years and wish to learn more about it before they proceed with the negotiations. The questions will have a specific intent at this point instead of generalized inquiries. Apart from asking the reasons your client is selling, some of the topics that the right buyers might ask about are:
- The biggest challenges of running the business.
- Specifics of the management team and/or employment history.
- Information about the relationships with the company’s vendors and suppliers.
- Though they will have seen the numbers at this point, they are likely to have questions about specific sales trends.
- What growth avenues the seller sees and why such opportunities have not yet been followed up on.
- The competition.