Dear Reader, while I have been a member of California Association of Business Brokers for 3+decades, most all my business sales have been the small mom and pop businesses that no one else wants to touch because the business is just too small. While the largest I've sold was (in today's market) about at $4-million hardware store, I have found simple ways to serve as consultant to help sell these small businesses. I can't help everyone this way but I can help a surprising number. These transactions are often stealth in nature where only a few people even know they are taking place. This article below is written by persons (competitors actually) who I hold in very high regard as to their experience, wisdom, and knowledge and so I share it with you while giving them credit. I work in the East SF Bay Area, Livermore, CA, but their comments are universally applicable.
My friends and members at CABB offer the following guidelines I find relevant in prequalifying small business buyers:
The Contributor: Peter Siegel, MBA
One of the major challenges faced by someone showing his or her business for sale in California is the appearance of people claiming to have the interest and the money to buy, but who actually are not qualified buyers. Because they waste so much of a seller's valuable time, and can compromise the selling effort by violating the non-disclosure rules, it's important that a seller avoid trying to work with these unqualified buyers. In order to do that, of course, it's necessary to know how to identify a time-waster, and to separate the unqualified from qualified buyers.
Surprisingly, some people make it a hobby to look at businesses offerings but with no intention of buying any business. They might ask intelligent questions, even show a financial statement that suggests they have the resources needed to make the purchase. And they often state an interest in making the purchase. But once bored with learning about one kind of business, the so-called buyer will start investigating something else. The seller who spent time, and opened his books to a pretend buyer will get nothing but a sense of confusion about why the buyer disappeared, and disappointment that no sale resulted from all of the time and effort.
More dangerous than phony business buyers are those who might like to purchase a business, but not at all the way the owner wants to sell it. These leverage artists and con men and women might go out of their way to impress and to charm a seller, perhaps take him out to dinner and repeatedly compliment him on the state of his business. But their real agenda has to do with striking a deal that enables them to "try out" or "lease" a business, or to purchase it with no money down. People like this may claim to be financially qualified, and in fact might have the cash needed to make the purchase, but their objective is to buy your business with your money.
Even experienced business sales intermediaries can be fooled from time to time by a time-waster who does a good job of acting like a real buyer. Still, there are some common things to look out for when showing the business. Identifying someone who is not a real and serious buyer when first meeting him or her can save a seller considerable time and aggravation.
Some ways that an unqualified business buyer might reveal that he or she is a phony, include:
1. Refusal to provide a financial statement and resume at, or prior to the first meeting. Or refusal to sign a non-disclosure before learning the identity of the business being offered.
Exchange of basic information is a standard practice in California when a business is being introduced to a prospective buyer, whether by a broker or the owner. That means the buyer learns the name and general information about the business, perhaps including some financial performance results, and the seller or licensed intermediary receives a signed disclosure form, personal financial statement and resume from the buyer. This exchange of information and documents usually takes place before any important discussion begins. Just as a buyer claims the right to see some information concerning the business about which he or she inquired, the seller has a right to know with whom he or she is dealing.
Refusal of a buyer to cooperate may take the form of an excuse such as "I won't disclose any information about myself unless I am interested in this business, so first, give me the details about what is for sale. If I'm interested in pursuing this further, I will supply personal information." Or words to that effect. This lack of cooperation with accepted practice is a warning that the buyer is not willing to play by the rules and may not be qualified to buy the business.
Another excuse: "Don't worry, I have plenty of money," might be acceptable if you recognize the interested party from photos you've seen of Bill Gates or Warren Buffet. Otherwise, you have no way of knowing whether the prospective buyer has any money to make the purchase. That's when the discussion should end.
Some sellers require a prospect to bring a letter from his or her bank's officer attesting to the fact that the individual has money in the bank. Such a letter should state the approximate value of the account, and point out how long the sum has been in the account. The reason for this requirement, obviously, is because a financial statement presented without verification that it is authentic could contain completely false and misleading information.
2. Questions about "alternative" ways of selling the business. A buyer might be open about her intentions and ask something like: "Have you considered leasing the business with an option to buy?" Or the questions and comments might be much more subtle such as a statement like: "This business will take a lot of cash to run. Maybe you should take a note for the full purchase price so a buyer can use his money to finance operations and growth." Another popular question is whether the seller is willing to co-sign with the buyer for the loan the buyer will need so he can give the seller a down payment.
An alternative way a buyer might approach this subject is by telling a story about a friend or acquaintance who, for example, bought a company in a "creative" way and made the business so successful that he could afford to pay the seller a bonus.
It's a good idea to be suspicious of any buyer who mentions a business transfer that does not correspond pretty closely to the asking price and deal structure presented by the seller.
3. Indications that a buyer is making false or misleading statements. In other words, catching the pretend buyer in a lie. A machine shop owner discussed his business with a prospect who claimed he was experienced in the industry. But the questions the buyer asked and the way he look puzzled when viewing the equipment, made it clear to the seller that this guy had no idea about the business. If the buyer tells you one lie, the chances are good that any statement about his or her interest in the business and willingness to observe guidelines suggested by your price and terms, is almost certainly a false statement.
Related to catching a buyer in a lie, is getting the "feeling" that a buyer is not what he pretends to be. Some individuals have a sixth sense about people and can usually tell when someone is not sincere or authentic. If you don't have that talent, watch closely for clues that the buyer is not who she or she represents. An ad agency professional shouldn't have dirty fingernails unless his hobby is rebuilding auto engines on weekends. The "buyer" who claims to have just sold a big business for a lot of money, is unlikely to pull up to the curb in a fourteen-year-old mid-priced sedan with a broken headlight and missing fender.
The seller of a business should make it the first priority to know with whom he or she is dealing before spending time and sharing proprietary information with a prospective buyer. The place to start is by observing these three suggestions. The consequences of lost time and heightened aggravation that results from dealing with unqualified people can discourage an owner from ever selling the business.
About The Contributor: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com
Comments Regarding This Blog Post
Contributor: Timothy Cunha JD
An interesting anecdotal figure for business sellers to ponder is that for every 100 inquiries I receive as a business broker, about 30 to 35 actually will complete the NDA and provide basic financial information. Prospective buyers (essentially, total strangers) are NOT entitled to the confidential information about a business without first agreeing to keep it confidential and proving that they have the financial resources and ability to actually complete a purchase. This is the first threshold: no NDA, no financials -- no confidential information. Period.
Another indicator that a buyer is not sincere or is not competent enough to buy the business is when they profess to be proficient in an area when its obvious they "haven't got a clue." For example, there is the buyer who knows nothing about accounting and, rather than spend a few hundred dollars on a professional consultant, asks totally irrelevant and unintelligible questions about the P&L, or the balance sheet, or the existing debt structure.
Frankly, if they are not going to invest a few dollars in hiring the expertise they lack, they are not going to be able to bargain in good faith for a realistic price for the business, they are not going to be able to finalize a contract, they are not going to be able to meet the standards of the landlord, and they are not going to be able to obtain financing.
Contributor: Business Appraisals, Valuations Advisor
One thing business brokers should realize is that they will probably waste 90% of their time looking for the right buyer and 10% closing the sale. I also found out over the 23 years that I sold businesses that I could not limit potential buyers by using my personal standards. I was very surprised that one of the individuals I thought unqualified for the business I sold actually doubled the sales in his first year and was very successful. Another Harvard Business School MBA graduate whom I thought had no chance of failure was forced to turn the business back to the seller within six months of the purchase.
I gave each potential buyer challenges to over come, an NDA, copies of their resume and financial statements and finally their own prepared letter of intent. At times I would comment to my seller whether or not I thought a potential buyer was sound, but the final decision was always his.
Contributor: Timothy Cunha JD
Often the best service I provide sellers is insulating them from the bogus buyers who will waste their time, sap their energy, steal their business ideas and plans, demoralize them, and contribute to the neglect of the business and consequent decline in value. While some business intermediaries advocate sharing a lot of sensitive, proprietary information with a prospective buyer based on the NDA alone, I caution my seller clients to be sure that the buyer is showing his good faith by making an offer with a significant deposit in escrow (or a smaller deposit and a letter of credit) before revealing too much of what's "behind the curtain." Since money deposited in escrow subject to due diligence is fully refundable to the buyer, it really is not at risk - but, it certainly separates the bonafide buyers from the bogus ones.
The second indicator is the prospect's ability or inability to make a decision. There's a distinct difference between prudent caution and fearful hesitation; the experienced business broker has seen both and usually can discern the difference, determining which buyer to take seriously and which to cut loose, quickly.
Contributor: Business Appraisals, Valuations Advisor
Before I was a Business Appraiser I was a Business Broker, and like all brokers I was always trying to sort out the sincere buyers. After many years of work and running into the same group of buyers I realized that there is a group of buyers that are truly sincere but could never take that leap of faith and buy a business. Their fear that they may be making a bad decision totally stops them dead in their tracks. I would estimate that 50% or more of buyer you run into will never buy a business.
Contributor: Business Broker, Northern California
The capitalist system is built on trust.
As Ronald Reagan was known to have said "Trust but verify". Trust cuts both ways in a transaction but the more each party is able to support their statements the greater the chances of success.
An effective way for a seller to decide early on if they wish to work with a buyer is to ask how they plan to finance the purchase. If the buyer states all cash its then easy to ask them to provide a copy of their bank statement with the cash sitting in the bank.
If the buyer says they plan to get an SBA loan then ask them to provide a letter from the SBA lender they have spoken to that has looked at the buyers financial statements and will be willing to make them a loan if they find the right business.
As the article says, if a buyer is unwilling to sign a Non Disclosure Agreement or provide a Personal Financial Statement then they can't expect to receive confidential information about the business for sale.