On Deal Talk, we often hear from former business owners who have sold their companies or professionals who are dedicated to helping entrepreneurs sell their...
How to Prescreen Buyers
Should you prescreen buyers?
If you chose to prescreen them, how should you go about doing it and when?
Should I even bother prescreening buyers?
The answer is usually yes, but it depends on how lonely you are and how busy you are. If you don’t mind wasting your time with unqualified buyers, then don’t bother prescreening them. If you are busy and have better things to do, then it makes sense to find out if you are dealing with a qualified buyer before you invest time in dealing with them.
How should I prescreen a buyer?
You can ask the buyer verbally how much they have to invest, what their credit score is, and what their net worth is, but at some point, you should get these answers in writing as the buyer is more likely to tell the truth if he must sign off on it. You don’t need to do this right off the bat; however, you should get the answers in writing at some point.
Don’t request a detailed three-page financial statement before meeting with the buyer. It is best to initially ask a few questions, then as the buyer shows more interest, you can prescreen them more thoroughly later on.
We initially send the buyer a brief electronic NDA to complete, that includes three basic prescreening questions. We recommend you do the same. Many buyers do not have a printer or fax machine and requesting that they print, sign, and fax the NDA may cause you to lose up to half of the buyers.
The questions we ask are:
- How much liquid cash can you invest?
- How is your credit?
- What is your approximate net worth?
After the NDA is signed and they appear to be qualified, we then email them a detailed business summary to review. This business summary is often 10-20 pages in length and contains answers to nearly all of the basic questions that most buyers ask. The summary is detailed enough for them to determine if they want to pursue the business.
If they are interested after reviewing the business summary, we will then do one of two things:
We set up a meeting with the buyer – We schedule an in-person meeting with the buyer and if the meeting goes well, we will then ask the buyer to complete a one-page personal financial statement and bring it to our next meeting.
We prescreen the buyer more thoroughly – We will have the buyer complete a one-page personal financial statement prior to scheduling a personal visit with the seller. We typically do this when the business summary we have given them is very comprehensive and covers most of the bases, and when we doubt the buyer’s financial ability to purchase the business. Our reasoning for asking them for a financial statement is that we have provided them highly detailed information on the business and it is only fair to ask for a little information on them to see if they are a “good fit.”
If they decide to make an offer, we will ask for even more detailed information which often includes a credit report, a highly detailed financial statement, and a buyer’s disclosure statement (if seller financing is involved).
What if the buyer refuses to complete a financial statement or provide any information?
I see this as a red flag and a huge warning sign. I won’t usually waste my time with that buyer. However, it does depend on how much time I have, how confidential the sale is, and how much activity we are getting on the business. If the seller is extremely motivated and time is running out, then we may deal with the buyer. 80-90% of the time, however, I will say no. Even if they are qualified, I don’t want to deal with an uncooperative buyer, and if you ask me, a buyer who refuses to complete two questions on a form is uncooperative.
Can’t the buyer just lie on their financial statement?
Lie? Buyers lie? That’s weird, I never heard of that before. Yes, of course, but they usually don’t if you ask them to sign off on their verbal statements. This is where the phased prescreening comes into play. Initially, you just ask for a document that is signed. When an offer is made, you may ask to see source documents such as bank statements.
Are there any other reasons I should prescreen the buyer?
Yes, to make sure they qualify for the lease. Know what your landlord is looking for in a tenant and see if the buyer might qualify.
Are there any other methods I can use to research the buyer?
Yes! I am glad you asked. Have you heard of Google? Of course, you have. Why not Google their name? If it is a common name, then be sure to include quotation marks around the name so the search is more specific.
(“John Smith”). You can also Google their phone number! Try it now, type in your phone number in Google like this “123-456-7890” (You don’t have to use the parenthesis.). If you do this correctly, then anywhere that number appears on the web should appear in the Google search results page.
There is an unlimited number of ways you can research someone using Google. If you are not highly familiar with search engines, then ask a close friend who is, and they can likely tell you other methods that you can use.
What do I do if the buyer does not respond to when I email him the NDA?
You have two options if the buyers are not responding. You can call the buyer and talk to the buyer before sending them the NDA and get them excited enough to follow through.
You can simplify the process and have the buyer sign the NDA electronically. If you are sending an old fashioned paper NDA that the buyer must print out, sign, scan/fax, then you are likely missing out on a large number of buyers. We will be introducing a service shortly where this is possible. Please follow our email newsletters and we will send an email update when this is available.