What Defines a Serious Business Buyer?
Individuals who desire to purchase an established small business must be well prepared before the search process begins. Well managed, profitable and successful businesses are in short supply and very high demand. Business owners and business brokers alike have little patience and interest in wasting their valuable time with buyers who have not taken the appropriate steps to demonstrate that they are fully prepared to acquire a business.
How does a buyer define themselves as being a “serious” candidate and not a casual, curious, tire kicker? The goal of this article is to outline the steps that a business buyer should take in advance so that they can stand out and be recognized as a serious and credible buyer?
Let’s start with a few examples demonstrating who is NOT a serious candidate.
- I want to buy a small business in the area but am not sure what type yet. Can you send me information on three of the businesses you have listed for sale – the industrial manufacturing business, the durable medical equipment company, and the online retailer?
- I am still working at my current job but am contemplating leaving the firm and purchase a business within the next couple of years.
- My background is entirely in the printing industry but I want to make a change and thought about buying a wholesale chemical products company.
- I have a little money saved up but need to get a loan to purchase a business. I am not sure how much I would qualify for or how large a business I could afford.
- I want to buy a business but will need the seller to finance the purchase. I will pay them back entirely out of the future cash flow of the company.
Preparing a business for sale takes considerable work on behalf of the business broker and seller. Just a few of the steps include valuing the business, preparing the Confidential Business Review (executive summary), and organizing all of the corporate, financial, and tax documents. For a buyer to be recognized as a serious candidate, they too have work that needs to be accomplished prior to being in a position to venture in the marketplace and begin assessing business opportunities.
So, what makes a buyer a serious candidate?
- Personal profile and resume
Construct a detailed personal profile and biography. Not only will the seller need to see this document but any bank requires this as well. A resume is just a starting place. The document should cover the following questions:
- What is your education and work experience?
- Who will be buying the business? Just you, you and your spouse, a partner, an investor?
- Why you are interested in buying a business?
- What is your investment criteria?
- What transferrable skills do you possess that qualify you for managing the business?
- How will you be financing the acquisition? If bank funding will be utilized, a prequalification letter should be included. How much money do you have for a down payment?
- What is your timetable to complete the acquisition?
- Who is your advisory team? Which attorney will be drafting the Asset Purchase Agreement and facilitating the closing? Do they have experience with business acquisitions?
- What are the contingencies for the business acquisition? Do you have to leave a current job? Do you have to secure funding from a partner or a bank? Do you have to relocate and sell a house?
How will the buyer be funding the purchase?
Buyers should be knowledgeable about the size of business they are qualified to purchase. Will the buyer be utilizing personal funds for the transaction or will third party financing be used? Most acquisitions (without real estate) require 25% of the purchase price as a down payment. (Funds needed for closing costs and working capital are often provided as part of the loan package and can be financed.)
Buying and selling a small business requires a two way exchange of information. The buyer should be ready to disclose the amount they can invest and have a detailed plan on how they will finance the entire transaction. The idea that the seller is going to finance the sale is not a plan and this type of buyer will be quickly dismissed. Business brokers can be a great source for recommendations on which lenders are appropriate and likely to finance the business they represent.
The buyer should have a current personal financial statement prepared. If bank financing will be utilized, the buyer should be clear on their borrowing capacity and have a lender prequalification letter in hand (a banker can prepare this in a matter of hours). Don’t expect the broker or business seller to provide complete access to sensitive and confidential business documents without receiving assurances that the buyer has the appropriate resources to either purchase the business outright or obtain a business acquisition loan.
What industry experience or transferrable skills does the buyer have?
The optimal situation is when the prospective buyer has direct industry experience. This is especially pertinent when bank financing will be involved. Obviously, every business is different and each will have unique requirements for successful ownership. For some businesses, the buyer may be able to satisfy this requirement by having related practical work experience or transferrable skills. Certain businesses may require licenses, certifications, or a particular expertise to operate. If the buyer does not possess these it will be critical to confirm that there is a manager or key employee in place that has these qualifications. In other situations, the business may be very specialized and a buyer lacking a critical credential will be disqualified from obtaining bank funding. These issues should be discussed early in the process as the business broker will need to determine if you are managerially qualified to operate the business.