When it comes to exiting a business, it's easy for owners to focus on the idea of a big payoff and ignore the details. With the prospect of retirement, investments and debt relief on the horizon, sellers sometimes forget other critical parts of the sale -- like choosing the most qualified buyer.
Moving forward with the wrong buyer can have severe consequences for business owners. If the buyer can't operate the business successfully or meet financial responsibilities, negative consequences can linger long term and cost thousands in lost profits. But unsuitable buyers affect more than just owners. A poor choice can impact employees, customers and community members.
So who are the "best buyers?" They are the prospects who will pay the best price, offer the best terms and serve as the best leader for the business. While it would be ideal for these people to reveal themselves when they respond to a listing -- that's not realistic. Instead, sellers must actively identify and win over the most qualified buyer.
Determine Your Requirements
It's important to decide what you want in a buyer before you list the business. Determine the level of experience you expect in a buyer, the required cash down payment and the ideal timeframe for the sale. Don't forget employee retention, branding, partnerships with vendors, the company name and other non-negotiable terms.
To avoid stress, financial loss and disagreements down the line, set hard parameters around financing the sale. Clarify how much of the sale price you will finance (if any) as well as the amount of collateral you will require if you offer the option of seller financing.
Create a Great Listing
The next step in attracting a qualified buyer is to create a great listing. The listing is buyers' first impression of your business, so it has to stand out from the crowd and weed out tire-kickers.
The formula to a great listing varies, but these tips can help get you started:
- Include relevant financial information.
- Provide geographic information.
- Include colorful descriptions and great photos.
- Create a catchy headline.
- Clearly identify contact information..
- List your business in two categories.
Pre-Screen Potential Buyers
Once the seller starts receiving inquiries, each prospect should be pre-screened to determine if they qualify as a serious business buyer. This is your opportunity to filter out looky-loos and tire-kickers. Enlist the help of a trusted partner, such as a business broker, to request additional information about their professional background, credit score, motivation for buying the business and how they intend to pay for it.
If the buyer presents as a strong candidate and wants to learn more about the business, use your discretion in providing any additional information about the business. If the sale of the business must remain confidential, prepare a non-disclosure agreement (NDA) in advance. Don't provide prospects any sensitive information about the business until they sign this agreement.
Due Diligence and Investigating Buyer Capabilities
Before a seller seriously accepts a buyer's offer, they need to take a closer look and ensure the buyer is the right fit for the business. Before the deal is finalized, the seller should verify the buyer's financial strength, business acumen, reputation and credibility. Keep in mind that serious prospects should be willing to allow a background check and provide financial information, including a credit report, bank statements, tax returns and any liabilities, such as rent or other monthly expenses.
Beyond financial information, the seller should verify whether the buyer has any legal judgements. They should also confirm that there is nothing outstanding that can hinder the buyer from obtaining any necessary license to operate the business. Additionally, the buyer should provide a list of personal and professional references that can vouch for their reputation. A strong, trusted leader is the best bet for ensuring the continued success of your business.
Understand the Types of Buyers in Today's Marketplace.
You need to know the intentions of buyers to avoid surprises down the line. Your hopes and dreams for the business are just as important as the buyer's -- and ideally they will go hand-in-hand. The buyer should have a business plan that describes his plan for the business and a strategy for success. There are generally two types of buyers to look for:
- Strategic Buyers. These buyers are primarily concerned about how your business fits with their own long term plans and current portfolio of assets. They are often competitors or a stakeholder in a larger business looking to diversify by entering a new market. Because of their personal interest in expanding their own offerings, strategic buyers will probably pay more than other prospects and then expand the business -- hiring more employees, increasing the customer base and adding products or services. They also offer greater seller security and control after the sale, with partnership opportunities and slower exit transitions.
- Financial Buyers. Financial buyers are more interested in the financials of your business -- they mostly care about profitability and stability. They are usually investors or private equity firms (rather than business owners) who want an investment that requires little involvement and a guaranteed return. To ensure this return, financial buyers won't hesitate to streamline operations, eliminate unnecessary intermediaries and possibly lay off employees. While this might be the type of buyer that fits your needs, it's important to consider the potential consequences of a financially driven purchase.
Take Advantage of Today's Market
In today's strong economy, buyers are eager to pursue business ownership while a steady flow of healthy businesses flows into the market. According to BizBuySell's 2018 Annual/Q4 Insight Report, a record number of businesses changed hands over the past year. In fact, 59 percent of owners credit the influx of buyers to a growing number people looking to escape the corporate world.
At the same time, a growing number of Baby Boomers are ready to retire and they're filling the market with high-quality businesses. Fueled by a strong economy, the median revenue of sold businesses grew over six percent in 2018, which is the highest financial performance of sold businesses since this data was tracked.
With transaction activity at such high levels, favorable market conditions are expected to continue into 2019. Yet, given the current political climate and rising interest rates, conditions could change. Sellers should take advantage of this favorable period and move quickly to find qualified buyers. Pre-screening and investigating buyer capabilities will not only save time, it will also help sellers make wiser choices and avoid headaches down the road.