Selling a small business is a process--that's a given. But veteran or repeat sellers know that this process can be made even longer and more difficult by "tire kickers," prospective buyers who lack the skills, interest, or financing to successfully acquire the company. Instead of advancing the sale, these buyers waste the seller's time and divert attention away from more qualified prospects.
Although indulging every interested party might seem like the polite thing to do, you have to focus your efforts on prospective buyers who have a genuine interest in acquiring your business and the ability to actually close the deal. The way to figure out if a prospect meets these requirements is to ask a handful of targeted questions designed to assess their expectations and level of readiness.
1. Is the buyer qualified to operate the business?
One of the first questions you should ask is whether or not the prospective buyer is qualified to run the business. If the buyer has already owned a similar company conduct basic research to determine the buyer's reputation in the industry. If they haven't owned a business before, ask how long have they have been thinking about buying a business and why they believe your company is right for them. Remember: even after the sale is finalized, your reputation and the livelihoods of your employees will be linked to the buyer so it's important to feel comfortable about their qualifications. Even more importantly, since most deals include at least some level of seller financing, your ability to receive full payment for your business rests upon the success of the business buyer.
2. How much capital does the buyer have for a down payment?
The question of capital is where the rubber meets the road for most prospective buyers. Buyers who have considered business ownership for a while understand capital requirements and will have an adequate down payment for the purchase. On the other hand, if the buyer expects you to finance the purchase with little or no down payment you'll know that they aren't a serious prospect and it's time to move on to more qualified buyers. Knowing the size of the buyer's down payment can also be useful information during the negotiation stage.
3. How is the buyer planning to finance the purchase?
Financing can be an insurmountable obstacle for unqualified buyers. It's completely reasonable for sellers to make early inquiries about how the buyer intends to finance the acquisition. If the buyer has a solid financing plan in place, including discussions and preliminary approval from potential lenders, it's an indication that the buyer is a strong candidate worth pursuing. By learning about the buyer's financing plans, you can also gain important insights about how long you will be attached to the company, especially if the buyer wants you (the seller) to finance part of the purchase.
4. What are the buyer's concerns?
Buyers who possess the skills and capacity to purchase your business have probably thought about owning a business for a long time, but legitimate concerns have held them back from pulling the trigger. By openly addressing the buyer's concerns, you begin to create a relationship built on trust and pave the way for a much smoother sale process. Alternatively, prospective buyers that approach you with little knowledge of which questions to even ask show that the likelihood that they will be the eventual buyer of your business is slim.
5. How does the buyer envision the transition period?
It's important to evaluate the buyer's expectations about the transition period as soon as possible. Typically, the buyer expects the seller to remain involved for a specified period of time after the sale (usually from three to 12 months)--particularly if the buyer has limited experience in the field. If the transition period will occur over an extended period, you will need to work some form of compensation (e.g. consulting fee, salary) into the deal. Qualified buyers understand this dynamic, and should be able to intelligently discuss the options and scenarios.
Many business sellers expect buyers to ask questions but haven't given much thought to the types of questions they should be asking. By asking strategic questions you can quickly evaluate the strength of the prospect and accumulate information that will be valuable as you move toward finalizing the deal.