5 Characteristics of a Qualified Business Buyer
Selling a small business requires a combination of time and patience--and no one wants their time wasted or their patience tested. So, as a seller, it's beneficial to weed out interested parties that don't really have the skill set, desire or funding to actually purchase the business. And, as a buyer, it's good to know what signals you as a serious buyer.
The road to buying a small business is paved with planning and preparation. The best way to determine whether potential buyers are qualified to see the deal through to completion is to gauge their intent and evaluate the amount of preparation they have invested in the process.
1. Does the prospective buyer have a solid business history?
A potential buyer should have no problem providing information about his or her business qualifications. If a buyer has already owned a similar company, conduct basic research to determine his/her reputation in the industry. Ask yourself, does the buyer possess the necessary education and, if relevant, necessary/helpful licenses or certifications? If the buyer hasn't owned a business before, they should be able to thoroughly explain why this business is right for them and what qualifies them to successfully operate your business after the sale.
2. Does the buyer have an adequate amount of capital for a down payment and how will he or she secure financing?
During the pre-negotiation stages of the process, it's critical to ask the buyer if he or she has an adequate down payment and how she plans to finance the remainder of the selling price. Additionally, you should ask the buyer to complete a Personal Financial Statement in which she outlines her assets and liabilities to provide some basis for you to verify that the buyer is financially qualified. Clearly, the buyer should have an adequate down payment, but serious buyers are also prepared to invest significant capital in the first year of ownership. If the buyer wants you to finance a portion of the sale (a very common requirement in today's challenging lending environment), the amount you need to finance, the risk you are assuming and the length of time you may need to be involved in the business in an advisory capacity are very closely related to the size of the buyer's down payment and access to other funding.
3. Is the buyer asking the right questions?
Qualified buyers have probably thought about owning a business for a while, maybe even several years. A serious buyer should not have a laundry list of general questions for the seller--a possible sign that the buyer hasn't adequately researched the industry or business ownership in general. Instead, qualified buyers should ask detailed questions related to your specific business. The buyer might inquire about the reason you are selling the business or ask about the biggest challenges the company faces going forward. However, they should also get into specifics such as employee history, the nature of the supplier relationships (and contracts), sales history and trends, sources of future growth, key sources of competition, etc. By asking questions like this, the buyer shows his/her experience and business acumen. By answering these questions (after securing a signed NDA, of course) you begin to establish trust with the buyer and pave the way for a smoother selling process.
4. Does the buyer understand the acquisition process?
Casual buyers often lack general knowledge about the acquisition process and the business-for-sale marketplace. Serious potential buyers understand the framework of business sales and appreciate the environmental, organizational, interpersonal and individual factors that are involved in the buying process. Does the buyer understand due diligence? Is he or she knowledgeable about various business valuation methods? Has he researched the business's history? Ideally, the buyer should have a clear understanding of the business acquisition process and may even be able to provide you with a written acquisition and business plan.
5. Is the buyer's heart in the process?
Potential buyers should be enthusiastic about the business and treat you with respect. They should listen thoroughly to all the details being delivered and take it to heart. After all, no one knows your business like you and if the buyer is serious about buying it they should have a keen interest in hearing what you have to say. A disengaged or half-hearted buyer is a definite indicator that the buyer isn't serious. At the same time, the buyer should (as discussed above) be prepared, well equipped and have his/her own ideas without being pretentious.
As a business seller, your goal is to identify the right buyer as quickly and efficiently as possible. By incorporating a handful of common sense strategies, you can weed out non-qualified buyers early and increase the likelihood of a successful sale process.