Qualify a Buyer So You Don't Waste Your Time! - O'Keeffe and O'Malley

Qualify a Buyer So You Don’t Waste Your Time!

Jun 09, 2014

One of the first steps in talking with a prospective buyer or in any negotiations to sell your business is to find out the buyer’s source of funds for the transaction. Many business owners feel uncomfortable with this step, because it requires asking personal questions about a person’s or a company's financial situation. Society dictates that we don’t discuss these things! Consider that the buyer will ask you all sorts of personal questions about your business and your financials. Use the buyer’s queries to ask for reciprocal information. Or, use an intermediary to take the embarrassment out of it. Just don’t skip or put off the process because it makes you uncomfortable.

The questions will vary somewhat, depending upon whether you are dealing with an individual, another business entity or a private equity group (PEG). But key questions that you can tailor are, “How much cash are you personally planning to invest in the transaction?” or “It will take about $X million cash (20% to 30%) to invest and leverage to do the transaction. Do you have cash funds to invest that amount?” For a party that has another business you could ask how much cash is available, what sales are, or how much stockholder equity is on their balance sheet. For a PEG you will want to ask, “Do you have a committed fund? What is the size of your fund?” Then listen very carefully to the answers.

If the answer is something like, “If the deal is right, the money will be there,” the money probably isn’t there. Or if they state "I have investors that are willing to put up the necessary cash funds"-- again -- they probably don't have the money, so you should respond with, "Please give me the names and contact information of the investors, and if investors are putting in some money, how much are you personally putting in?

We would feel comfortable spending time with a buyer who says, “I plan to invest in a manufacturing business, and I have $1,000,000 of my own funds, as well as a commitment from ABC Bank for up to $3 million more.” That’s a buyer that knows what he plans to do! 

However, buyers have been known to exaggerate, so this positive answer is no substitute for proof of fund sources. Before the negotiation process gets too far along, ask for a financial statement; do a D&B search; run a credit report; ask to see the commitment letter; ask for bank references; make sure this person or buying entity is real. Even doing a Google search on a prospect can turn up interesting information on their history.

Often buyers expect the seller to finance a large amount of the selling price, so ask them if this is the case. A seller should expect to carry a token amount (around 10%) of the price but not a significant percentage.

We have heard of businesses posing as a buyer merely to obtain competitive information about a business to expand their existing business or perhaps to guide them in their strategic growth plan to enter a new market or even to find good employees. Have the buyer execute a confidentiality agreement and a non-solicitation agreement early in the process.

There is another qualification aspect beyond the financial. The buyer must be capable of running the business, either as an investor or as an operator. The seller must feel comfortable with the buyer’s competence in this particular business. The chemistry must be right.

If practical, review the buyer’s resume or the business website before the first meeting. Spend time in the first and second meetings just getting to know the buyer as a person. Find out why the buyer is interested in your particular business. Get a feeling for goals and aspirations, and try to decide if the chemistry is right. We’ve had sellers tell us that they just don’t feel comfortable with a particular buyer. If you can’t get at the root of this uneasiness, end the negotiations. Your intuition or gut feeling is usually valid, so why waste your time or the buyer’s time?

There is a lot of emotion in selling a business, especially on the seller’s side. That emotion has to be dealt with. If the chemistry isn’t right, you’re courting an explosion. We have yet to meet a seller who wasn’t deeply concerned about what was going to happen to the business after it sold.  Sellers are concerned about the selling price, but they are also concerned that the business survives and prospers, that the employees get a fair shake, and that the customers and suppliers are properly served.

Serious, qualified buyers expect you to demand financial and personal qualifying information; they are happy to give you the information. After all, this could end up in a bidding contest, and the buyer realizes that the better qualified they are, the more likely they will succeed.

For more information about the steps to buyer qualification, call us at 913-648-0185.