The next step, in most cases, is to pre-screen the buyer. Obtain additional information about the buyer ― if you do not already have it. Before you invest time and energy in negotiating with prospective buyers, you first want to ensure they are motivated and financially capable of purchasing your business.
“Don’t waste your time and energy on buyers who are not qualified.”
The process may change slightly depending on whether the buyer is an individual, a company or private equity group.
If the buyer is an individual, we ask the buyer to complete our ‘Buyer Package’ that requires them to indicate information including their name, date of birth, address, phone numbers, spouse’s contact information, credit score, background and employment information, decision makers involved in the process, business ownership experience, spouse’s level of involvement in the business, and education.
The ‘Buyer Package’ includes a disclosure statement that enables us to find out a few additional pieces of essential information on the buyer, such as if they have ever filed for bankruptcy, been convicted of a crime, and answers to several other critical questions. The buyer must also complete personal financial statements. This information will help you evaluate both the quality of the buyer and the quality of their offer.
Is a $2 million offer good or bad? If it is from a buyer with a net worth of only $100,000 who has been convicted of multiple felonies and has just recently declared bankruptcy, then it is clearly a waste of time negotiating with this buyer. If, on the other hand, you have an all-cash offer from a serial entrepreneur who has an 800 FICO score and a related background, then perhaps it is worth pursuing.
You may either request the completed buyer package first before any offer is made or you may request the buyer to complete the offer and the buyer package at the same time.
At Morgan & Westfield, we have simplified this process for both sellers and buyers by combining the ‘Buyer Package’ with a simple term sheet, a document used to negotiate the basic elements of the deal. This eliminates the need for the parties to hire attorneys and unnecessarily focus your energy on the language on the deal, as opposed to allowing you to focus on the essential elements of the deal.
“What to do when a buyer makes an offer: 1. Pre-screen the buyer; 2. Negotiate the major deal points.”
Pre-screening and negotiating the major deal points can be done sequentially or simultaneously. If the buyer is requesting additional meetings or information, ask them to complete the ‘Buyer Package’ first, without the term sheet. Doing so will ensure you are negotiating with a qualified buyer and will motivate you to invest more energy into the deal.
We follow the same process even if the buyer is a corporation, a company or a private equity group, but we use different forms.
The major mistakes most entrepreneurs make during this phase of the deal are wasting energy on buyers who are not qualified and judging the quality of an offer without first obtaining any background information on the buyer.
Even if the deal is for all cash, the buyer will still need to complete due diligence before finalizing the deal. Having essential background information on the buyer will help you make an intelligent plan before you take the next steps.
― Jacob Orosz, Morgan & Westfield