How Buyers Are Screened

Before you invest time and energy in negotiating with prospective buyers, you should first establish that they’re sufficiently motivated and financially capable of acquiring your business. Doing so will help ensure you’re negotiating with a qualified buyer and motivate you to invest more time and energy into the process.

Most buyers who aren’t serious won’t go to the trouble of completing a detailed buyer profile, so the fact that the screening process takes time will itself help weed out tire kickers. If a less-known potential buyer submits an offer, such as an independent sponsor, they should provide you with source documents to verify their financial ability to complete the transaction, which will allow you to screen them more thoroughly and with confidence.

Part of your initial due diligence also includes assessing the buyer’s motivation level. When dealing with potential buyers, ask yourself the following questions: 

  • How motivated does the buyer appear? 
  • Do they quickly return your calls and emails? 
  • Are they eager to move forward, or do they seem overly critical? 

Keep in mind that overly critical buyers usually don’t have serious intentions of buying a business. Also, the process for screening buyers may change slightly depending on their type – whether the buyer is a direct competitor, a strategic buyer, or a private equity firm. 

The sale of a business can be compared to a sales funnel. There are major steps along the way, and buyers drop off at each step.

Reasons for Screening Buyers

If you’re financing a portion of the sales price or if a portion of the purchase price is contingent, you should screen the buyer just as any bank would. But even if you aren’t, you should still make sure that your buyer’s finances are in order. This is particularly important because: 

  • Due diligence is a serious commitment for you and can cost you tens, or in some cases, hundreds of thousands of dollars in professional advisor fees paid to attorneys, accountants, and other third parties. It’s therefore wise to verify that the buyer has the financial ability to consummate the transaction before investing significant time or money in performing due diligence. 
  • Even if the buyer is paying all cash and no third-party approvals are required, fraud and theft are still a risk for any seller. You will be giving the buyer access to highly sensitive information, such as bank statements and tax returns. Screening the buyer gives you the assurance you’re dealing with a legitimate party.

Use a Phased Screening Process

Releasing information in phases saves time, preserves confidentiality, and ensures that unqualified buyers aren’t provided sensitive information about your business. This is necessary because most buyers will refuse to be thoroughly screened at the initial stages when they haven’t yet decided to take a closer look. Buyers will often be particularly wary of disclosing their information before they receive details on your business. The solution to these problems is to ask the buyer for qualifying information in stages as they progress through the steps of acquiring your business. 

The first step in determining if they’re serious is to ask the buyer to sign a non-disclosure agreement (NDA) and buyer profile. Once buyers have completed these documents, they will then have access to your confidential information memorandum (CIM), which contains more details on your business.

If the buyer is interested after they review your CIM, they may ask to meet you personally or request additional information, such as financial statements, prior to a meeting. 

The beginning stages of the process from the buyer’s perspective look like this:

  • Sign an NDA, buyer profile, financial statement, and disclosure statement.
  • Receive the CIM on your business.
  • Request additional documents, such as an interim financial statement, or a personal meeting. 
  • Submit a letter of intent (LOI).
  • Move into due diligence if the offer is accepted. 

Once the LOI has been received, you will review the buyer’s information and accept, reject, or counter the offer. Due diligence begins after an offer is accepted, at which time a further mutual exchange of information ensues. At the beginning of the sales process, you’re making claims that aren’t verified until an offer is accepted and the buyer moves into due diligence. 

Releasing information in phases saves time, preserves confidentiality, and ensures that unqualified buyers aren’t provided information about your business.

Uncooperative Buyers

The sales process can be long and arduous. Finding a cooperative and realistic buyer who’s easy to work with is just as important as finding someone willing to pay your price. The following section covers some examples of problematic buyers and how you should respond to them.

Buyers Who Refuse To Be Screened

Most deals with buyers who refuse to be screened or are otherwise uncooperative end up falling apart. These buyers will try to bargain for much more than you initially agreed to. They may also threaten lawsuits, threaten to leak word of the sale to competitors, and more. Don’t waste your time with them. Find a buyer who’s easier to work with and who is cooperative enough to get a deal done. Remember, all transactions require cooperation from both the buyer and seller. If you encounter a buyer who seems exceptionally rigid or demanding in your initial conversations, move on.

Buyers Who Refuse To Complete a Buyer Profile

Refusing to provide information is a red flag. Don’t waste your time with uncooperative buyers. I don’t recommend providing information to any buyer who refuses to disclose any information about themselves. Even if they are qualified, refusing to complete a simple form is a red flag, and it’s difficult to progress with the transaction with uncooperative buyers.

Buyers Who Don’t Respond 

A common question involves wondering how many times you should follow up and my advice is simple – you shouldn’t have to chase down a buyer. I recommend following up a maximum of two or three times. A buyer must be sufficiently motivated to go through the process and has plenty of opportunities to change their mind, so don’t go running after them. If you have to chase a buyer or “push” them through the sales process, it’s unlikely they will follow through to closing the sale. A lack of follow through on the buyer’s part is a red flag that they lack sufficient motivation to complete the transaction, and I recommend avoiding any buyers you need to pursue to move the deal forward.

Verifying Information on the NDA

Should you verify the information on the NDA? No. Based on my experience, only a small number of buyers provide inaccurate information, so verifying each buyer’s information is impractical and will likely scare them away this early in the process. Few buyers lie on their buyer profile, especially when you ask them to sign the document. Buyers know that their representations are verified later in the process, and few will falsify this information.

The screening process involves releasing information to the buyer in phases. This means that as you release more information about your business, you’ll also request information from the buyer, which will provide you with an opportunity to verify their data at a later stage in the transaction.

What Happens After the NDA is Signed

The sequencing of events in any deal is important. Here are my tips for what to do after an NDA has been signed:

  • The CIM should be sent to buyers as soon as they sign the NDA. Buyers will often ignore your emails if they don’t immediately receive a professionally prepared package about your company right off the bat. 
  • It takes two to four months to close, on average, once you accept an LOI. I have closed some transactions in as little as one month, while others have taken more than six months to consummate once the LOI was signed. It generally takes one to two months to complete due diligence and another one to two months to close once due diligence has been concluded. The process can take longer if third-party financing is involved or if complications arise during the process.
  • Run your business as if you’re never going to sell it. Don’t get hung up on one buyer so much that you lose focus on your business and revenue begins to slide. Avoid becoming emotionally invested in any one buyer. Spend time with them, give them what they need, and treat them with respect while staying focused on running your business until the closing.