Vetting a Buyer for Your Business
Most small business owners have the majority of their wealth tied up in their business. They’ve worked decades growing their business in anticipation of someday cashing in and settling into a comfortable retirement.
Once the decision to sell is made, it is crucial the business owner selects the right buyer. Too often a buyer is chosen without sufficient vetting. According to previous broker surveys, 90% of buyers never follow through on buying a business. A seller must take their time making sure they are engaging with the 10% of buyers that are serious. If the wrong buyer is selected it will set the selling owner back months in the process and could eventually force them to go off market.
What Questions Should You Ask a Buyer?
1. Can You Show Me the Money?
Proof the buyer has the money to get the deal done should be provided at the onset. If the buyer is an individual, a Personal Financial Statement (PFS) must be provided. This offers a recap of their assets/investments and itemizes their liquidity. The buyer should also provide a supporting letter from their lender.
If the buyer is strategic, appropriate financials should be requested, including balance sheets and income statements. If you are engaged with a financial buyer, such as a Private Equity Group, make sure they have funds under management or actual money already invested (versus signing a LOI with you and then going out to find the money).
2. How Long Have You Been Looking?
It’s a good sign if the buyer has been looking six months or more, or preferably over a year. This means they have most likely viewed a few businesses and have a fairly good idea of what they want. Rarely does a new buyer buy right away.
You want a buyer that has made offers and lost out, as this creates a motivated buyer. A red flag would be if the buyer is also looking for employment while searching for a business part time; this indicates indecision and/or doubt.
3. What Do You Bring to the Table?
If your prospective buyer is an individual, have they owned a business before or been around business ownership with a family member? Do they have strong business management or sales and marketing skills? These are good signs as they show the necessary knowledge as well as an understanding of risk and hard work to succeed.
If yours is a strategic buyer, how will their current business endeavors align with the services or products you offer?
If your considered buyer is a financial buyer, does their portfolio include businesses similar to yours in other cities?
4. Can You Reassure Me?
Ask for references. Talk to people who have done deals with the buyer before. If the buyer has not done a transaction in the past, talk to people who have worked with them in a professional capacity. You should also do a background check on the individual you are dealing with. A company such as Truthfinders can provide you with ample information.
5. What Are Your Plans Once You Own My Business?
Oftentimes sellers don’t dig for this answer. This is a very important question, especially if there are deferred payments structured into the deal. Also, if the buyer plans to lay off employees and move your business out of your community, this could put you in a very stressful situation if you continue to live there.
Lookout for Unscrupulous Buyers!
Beware of buyers that use unethical tactics. One example would be the buyer that makes an extremely high offer only to get you off the market, knowingly planning to retrade (negotiate a lower price) during due diligence. Another unprincipled buyer is the competitor or individual who has no intention of buying your business but seeks to gain an intellectual advantage from the information you share, or start a competing business.
Once you decide to sell your business you will encounter many types of buyers. To protect yourself and maximize the outcome make sure you are engaged with an M&A professional that can help you manage the vetting process. Once you feel comfortable with the chosen buyer, and they’ve successfully answered the above five questions, you will be on your way to cashing in on your number one asset.
The following two articles also provide valuable tips when vetting a buyer, “7 “Red Flag” Comments from Buyer’s” and “How Do You Know When You Have. Serious Buyer”.
This article was written by Sam Thompson. Sam is the president and owner of Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary (CBI) who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming a business broker, Sam was a successful CEO and business owner for 29 years before selling his $16 million business.