Individuals who desire to purchase an established small business must be well prepared before they begin. Well-managed, profitable and successful businesses with a bright outlook for the future are in short supply and very high demand. Those that have built successful businesses should not have to waste time qualifying a potential buyer when it comes time to sell.
How does a buyer define themselves as being a “serious” candidate and not a casual, curious tire kicker?
Preparing a business for sale takes considerable work on behalf of the seller – valuing the business, preparing a confidential offering memorandum, and organizing all of the corporate, financial and tax documents are tasks managed by the brokerage and other advisers.
It is up to the buyer to prove he or she is serious candidate.
Personal profile and capacity
At this point, a buyer should consider themselves a job applicant and the person hiring is the business (seller), the lender and likely their family. Other than taking account of education, experience, transferable skills, etc., the buyer should have a strong sense of their passions and an open capacity to learn.
Every business is different and each will have unique requirements for successful ownership. Certain businesses may require licences, certifications, or expertise to operate. If the buyer does not possess these it will be critical to confirm that existing company employees do and are likely to remain. And, clearly, a buyer who lacks critical credentials will be disqualified from obtaining bank funding.
A serious buyer will have developed their business investment criteria including type, industry, geographic location, size and the price of the enterprise.
The buyer should focus on enterprises that are suited to their background and qualifications. Those persons who only seek “profitable businesses” without regard to fit and capacity will soon hit a financial wall.
Buyers should also strive to understand the size of business they are qualified to purchase. Most acquisitions (without real estate) require 50 per cent or more of the purchase price as a down payment. The balance, including working capital, may be financed. However lenders restrict loans on basis of fair market value (FVM) of assets, inventory and free cash flow and, as such, the purchaser will often be directly financing the majority of the transaction.
The buyer should prepare a personal financial statement – as both the business broker and seller will seek such assurance of ability to invest.
If bank financing will be utilized, the buyer should be clear on their borrowing capacity and have a term sheet from a lender. Business brokers can be a great source for recommendations on which lenders are appropriate for the business in consideration.
Business ownership involves taking on some level of risk and acquiring a business is no different. There will be areas of improvement for every business and the buyer will have to make a decision as to which negative elements are acceptable and which ones are not. Additionally, buyers often fail to realize that there is a limited supply of great businesses for sale – those with solid growth and earnings.
Many successful businesses sell for the full listing price and often there are multiple buyers who are evaluating the business simultaneously.
Ability to react quickly
A serious buyer is well organized, has done their research, and is decisive and capable of moving through the process in a timely and methodical fashion. Buyers should have a ready stable of advisers who are aware of the acquisition search and can react when tasked.
Understanding of how businesses are valued, as well as a solid comprehension of the typical steps in the acquisition process is critical for a buyer to know. Funding for the acquisition has been planned and money for deposit is liquid and available.
Once the opportunity is qualified, it’s time to make a realistic letter of intent or offer to purchase and with support of advisers – proceeding into the due diligence, definitive agreement preparation and closing phases.
A serious buyer is honest, direct and forthcoming. His or her investment criteria, timeline financial wherewithal and reasons for pursuing the acquisition should be articulated as early as possible. Buyers should recognize the business-for-sale industry is not the real estate industry. There are no open houses. This is a highly confidential process where professionals are retained to protect the sensitive data on the business for sale and a haphazard buyer will be resisted. One viable solution for a serious buyer is to retain a business broker to assist with the business qualification of a specific opportunity or targeted search. A buy-side broker is paid by the prospective buyer for the time, energy and work that is generated on their behalf. They are compensated to produce results.
There is nothing worse than going through the myriad of steps in preparing a business for sale only to find a buyer that is not equally as prepared to acquire a business. Few parties in this arena want to have their time wasted or patience tested.
The bottom line is that when a buyer finds the right business, her or she should be in a position to act and make a realistic offer. Buyers should also know and respect how accredited business brokers (and accountants, bankers, lawyers, etc.) can support and guide them in helping reach their goals