Mergers & Acquisitions

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Selling a Business | How to Screen Individual Buyers

There’s an adage in journalism that holds, “If your mother says she loves you, check it out.” The idea behind this dictum is to caution reporters to always confirm the facts.

The same principle holds true when it comes to dealing with prospective buyers of your business. A buyer might tell you they’re financially qualified to take over your company, but are they really? A buyer might try to convince you that they have the necessary tolerance for risk to take on your business, but how do you know for sure?

This article will address in detail the questions that are central to determining your suitor’s financial wherewithal, their sincerity, their motivations, and more, to wit:

  • When should I screen buyers?
  • How do I screen a buyer’s financial qualifications?
  • How do I screen a buyer’s motivation level?
  • Should I screen first-time business owners differently than previous business owners?
  • How do I screen a buyer’s tolerance for risk?
  • How do I screen a buyer’s expectations to make sure they are realistic and that they are not looking for the “perfect” business?
  • Does it matter how long the buyer has been in the market?

Here’s the scoop on getting the scoop on your buyer…

Table of Contents

  • Screen Buyers Before Evaluating an Offer
  • Screen Buyers Financially
  • Screen Buyer’s Motivation Level
  • Treat First-Time Buyers and Previous Business Owners Differently
  • Screen Buyer’s Tolerance for Risk
  • Avoid Buyers Looking for the Perfect Business
  • Avoid Buyers Who Have Been in the Market for Too Long

Screen Buyers Before Evaluating an Offer

Is a $2 million offer good or bad?

If it’s from a buyer with a net worth of only $100,000, who has been convicted of multiple felonies and has just recently declared bankruptcy, it’s likely 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, perhaps it’s worth pursuing.

Screen Buyers Financially

Many buyers are unrealistic regarding how much money is required to buy a business. Most are undercapitalized. As a result, many stay in the market for a long time because they don’t have enough liquid cash to buy a business.

Also, many of these undercapitalized buyers make offers on businesses that are contingent on bank financing, and most of these deals are turned down by banks, often months later.

As a result, it’s critical to screen buyers financially to ensure they have the wherewithal to complete the transaction before you commit your precious energy and time to negotiate with these buyers.

Screen Buyer’s Motivation Level

Some buyers are working at their day jobs and are secretly looking for a business during their work hours. They have no choice but to correspond through email. Other buyers prefer talking to someone on the telephone about the business.

If the buyer is local, then politely request that they meet you at your business, so you can give them a tour and answer their questions. This process weeds out buyers who sit at home and dream about buying a business. It is a give-and-take process, so give the buyer detailed information, then request that they spend time to meet you.

Treat First-Time Buyers and Previous Business Owners Differently

First-time buyers are great buyers if and when they decide to pull the trigger. Assessing their tolerance for risk, however, is difficult.

Buyers who have owned a business before are accustomed to making decisions based on incomplete information. They are more likely to make an offer on a business. Previous business owners are also aware that there is no perfect business.

On the other hand, employees often do not understand what it means to be a business owner and are not accustomed to making decisions based on a “gut feeling” or a lack of complete information. They also may be more averse to risk than those who have owned a business.

Screen Buyer’s Tolerance for Risk

Screening a first-time buyer’s tolerance for risk is difficult — but there is a simple test for assessing this buyer’s tolerance for risk. A highly motivated buyer has the strength and commitment to overcome their fears and will develop the courage to make an offer. Buying any business is accompanied by some degree of risk and therefore fear, and it’s critical that a buyer is able to face their fears.

Have you met with a buyer five or six times, and they are requesting even more information about your business? The most effective method to assess this buyer’s tolerance for risk and ability to face their fears is to ask the buyer to make an offer. Those willing to take the plunge will make the offer. Risk-averse buyers will be overcome by fear and disappear. A buyer must face this fear directly if they are ever going to buy a business.

Avoid Buyers Looking for the Perfect Business

Beware of the buyer whose goal is to buy the “perfect” business and eliminate all forms of risk. This buyer will never buy a business.

This type of buyer is easy to spot but difficult to describe. You know ‘em when you see ‘em. They have been looking for a business for three years and have looked at over 100 businesses for sale. They will initially seem extremely interested in your business and will request meeting after meeting only to find out, at the last minute, that your business isn’t “perfect.”

Challenge the buyer and educate them that there is no perfect business. Explain to the buyer that you thought the exact same thing before you bought the business.

Talk openly about the buyer’s fear. Empathize with the buyer and challenge them to pull the trigger. Don’t meet with the buyer more than three to four times unless they make an offer on your business, which is the ultimate test.

Avoid Buyers Who Have Been in the Market for Too Long

Buyers should be able to identify a business and make an offer within six to 12 months. They should be able to close on a business within 12 months of starting the process. If the buyer has been in the market for over a year, you may have problems. Occasionally, we see buyers who have been in the market for one to two years; however, we almost always dismiss buyers if they have been looking for over two years. One to two years is a coin toss. A buyer who has been in the market for over two years is a red flag.