Before attempting to buy a small business, it is essential that you are prepared. Highly successful, well-managed companies are rare and in high demand. Both business owners and brokers are not willing to waste their time dealing with buyers who don’t have the proper steps in place to show that they are ready to purchase a business.
What does it mean to be a serious buyer and not just a casual, curious, or tire kicker? This article will outline steps that business buyers should take to be identified as severe and credible buyers.
Let’s begin with some examples that show who is not a serious candidate.
I am looking to purchase a small business in the local area, but I’m not sure which type. Please send me information about three of your businesses for sale: the industrial manufacturing company, the durable medical equipment business, and the online retailer.
Although I’m still employed at my current position, I’m considering leaving to purchase a business.
Although my background is primarily in the printing industry, I am open to making a change and considering buying a wholesale chemical products business.
I have some savings but need a loan to buy a business. I don’t know how much or how big a business I can afford.
I would like to purchase a business, but the seller will have to finance it. They will be paid back entirely out of future cash flow.
The preparation of a business to sell requires a lot of work from both the seller and the broker. The steps include valuing and preparing the Confidential Business Review (executive summary), as well as organizing all tax, financial and corporate documents. Before a buyer can be considered a serious candidate for the market, there are many tasks that must be completed before they can begin to evaluate business opportunities.
What makes a buyer a severe candidate for a job?
Personal profile and resume
Create a complete biography and personal profile. This document will be required by any bank. Resumes are only a beginning. These are the questions that your resume should address:
What are your educational and work experiences?
Who will buy the business? Only you, your spouse, a partner, or an investor will buy the company.
What are you interested in purchasing a business?
What are your investment criteria?
What are the transferable skills that you can use to manage the business?
What financing will you use to finance the acquisition? A prequalification letter is required if bank funding is being used. What amount of money are you able to pay for a downpayment?
How long is the acquisition expected to take?
Who will be your advisory team? What attorney will draft the Asset Purchase Agreement? Are they familiar with business acquisitions?
What are the risks involved in acquiring a business? Are you required to quit your current job? Are you needed to get funding from a bank or partner? Are you needed to sell or relocate your house?
What will the buyer pay for the purchase?
Buyers need to be aware of the business size they can purchase. Will the buyer use personal funds or third-party financing? Most acquisitions, even those that do not involve real estate, require a 25% down payment. (Funds for closing costs and working capital can often be included in the loan package and can be financed.
A two-way exchange of information is required when selling or buying a small business. The buyer must be prepared to share the amount they are willing to invest as well as a plan for how they will finance the transaction. This is not a plan. Buyers who think the seller will finance the sale will quickly be dismissed. A business broker can provide great recommendations about which lenders might be best suited to finance the company they represent.
A current financial statement should be prepared by the buyer. A buyer who is seeking bank financing should have an accurate understanding of their borrowing ability and a letter from a lender to prequalify them. This can be done quickly by a banker. You shouldn’t expect the seller or broker to have complete access to confidential and sensitive business documents without obtaining assurances that they have the resources to purchase the business or to get a loan to acquire it.
Which industry experience and transferable skills does the buyer possess?
A prospective buyer with direct industry experience is the best situation. This is particularly important when financing from banks is required. Each business is unique and will need different requirements to be successful as an owner. Some companies may require the buyer to have relevant work experience or transferable skills. Some businesses might require certifications or licenses to be able to operate. It is essential to verify that the buyer has these qualifications. Other situations may require a highly skilled buyer to obtain bank financing. These questions should be discussed as early as possible. The business broker will need the information to determine if the buyer is qualified to manage the business.
What type of business is the buyer looking for and why?
A serious buyer will have clear and concise investment criteria for the business they are looking to buy. A number of factors will be considered when determining the investment criteria, including the type of business and industry, geographic location, size, price, and value of the company.
Serious buyers will only focus on companies that are suitable for their qualifications and background. Buyers who inquire about a restaurant or industrial packaging distributor will not be considered serious candidates. A candidate who has narrow investment criteria and only thinks “profitable businesses” or those businesses that generate at least $150,000 in cash flow, regardless of the type, industry, geographical location, or size, is not a serious candidate.
Entrepreneurs who are successful recognize that there is no perfect company. A business acquisition is no different. Business ownership requires taking on some risk. Buyers looking to buy a business that is free from any defects will take a long time. Every company has areas for improvement, and the buyer must decide which of these negative aspects are acceptable. If buyers are not willing to take on risks, it may be difficult for them to buy small businesses. Instead, they might consider becoming employees.
Buyers often don’t realize the limited supply of businesses available for sale. These include those with excellent profit margins, year-over-year revenue growth, and bright future prospects. These businesses often sell at the total listing price. Buyers should not submit offers less than 90% of the listed price for these kinds of companies. There are often multiple buyers evaluating the company. Those who submit low-ball requests or unrealistic terms will waste the valuable time of all involved. They may also burn a bridge with business sellers and eliminate themselves from consideration.
Serious buyers are organized and have done an extensive research to determine what they need and what they can afford. They are determined and can move through the process quickly and efficiently. These individuals will be consulted in advance to ensure that they are aligned with the objectives. Advisors who will assist in the evaluation are informed of the acquisition search and are available to help with their assignments.
The value of businesses is essential to any serious buyer. They should also be familiar with the steps involved in an acquisition. A list of carefully crafted and thoughtful questions is prepared to help them determine if the opportunity matches their investment criteria. Serious buyers recognize that a fast no is better than a slow one and address any gating issues that could prevent the business from being purchased. After the opportunity has been qualified, a severe buyer can make a realistic offer and provide a letter or terms sheet. The Asset Purchase Agreement has been drafted, and the transaction is closed by a professional support team. A serious buyer will be able to understand due diligence and have their checklist in place. The acquisition funding has been prepared, and the money to make an earnest money deposit is available.
Serious buyers are honest, open, and forthcoming. This is not the right time to be evasive, coquettish, or cute. At the earliest possible opportunity, you should communicate your investment criteria, timetable, financial resources, and reasons for considering the acquisition. This communication will establish trust and allow for honest dialogue in the weeks to come. A business broker can help buyers who are serious about buying a business. This method yields better results than simply submitting requests for information about any company that is posted online. The real estate industry is not the business-for-sale sector. There are no open houses. This is a confidential process in which professionals are involved to protect the confidentiality of the business data. The buyer pays the buy-side broker for their time, energy, and work. They are paid for generating results.