Welcome to our Knowledge Base
< All Topics

Selling a Business | How to Screen Individual Buyers

In the world of journalism, an adage stands strong: “If your mother says she loves you, check it out.” This guiding principle underscores the importance of verifying facts before accepting them as truth.

Likewise, the realm of engaging potential buyers for your business follows a similar doctrine. While a buyer might assert their financial readiness or risk tolerance, prudent inquiry is essential. Can their claims withstand scrutiny? Are their motivations as genuine as they appear?

This comprehensive article delves into the core queries that unravel your suitors’ financial solidity, authenticity, incentives, and more. Addressing pivotal questions such as:

  • When is the ideal time to screen buyers?
  • How does one assess a buyer’s financial eligibility?
  • What methods exist to gauge a buyer’s commitment?
  • Does the approach differ for first-time versus experienced business owners?
  • How can a buyer’s risk threshold be ascertained?
  • Are a buyer’s expectations grounded and pragmatic, avoiding the pursuit of perfection?
  • Does the duration of a buyer’s market presence hold significance?

Embark on a journey of insight and certainty as you unravel the layers of understanding required to comprehend your potential buyer’s landscape.

Screen Individual Buyers Before Evaluating an Offer

The verdict on a $2 million offer hinges on the source.

If it arrives from a buyer with a mere $100,000 net worth, entangled in a history of felonies and recent bankruptcy, it’s pragmatic to view negotiations with skepticism. Conversely, when an all-cash proposition stems from a seasoned entrepreneur boasting an impressive 800 FICO score and relevant expertise, exploration may be warranted. This discerning evaluation directs you toward an informed decision, rooted in the buyer’s credibility and potential.

Screen Buyers Financially

A prevalent issue arises as many buyers underestimate the financial commitment required to acquire a business. A significant portion of these potential buyers lacks adequate capital. Consequently, an extended period of engagement is common due to their insufficient liquid resources for purchase.

Moreover, a considerable number of these financially constrained buyers extend offers contingent on bank financing. Regrettably, a substantial portion of these proposals face rejection from banks, often after prolonged intervals.

Hence, it becomes imperative to conduct financial screenings of buyers. This practice ensures that the necessary financial capacity exists to facilitate a successful transaction. By doing so, you preserve your valuable time and efforts, channeling them effectively towards negotiations that hold genuine promise.

Screen Buyer’s Motivation Level

Certain buyers adeptly juggle their regular jobs while discreetly exploring business prospects during work hours. Email becomes their conduit of choice for correspondence. Conversely, there are those who lean towards telephone conversations for a more interactive exchange.

For local prospects, a courteous approach involves proposing an on-site visit to your business. This initiative serves a dual purpose – an informative tour and direct answers to their inquiries. This methodology effectively sifts out casual dreamers from serious buyers. In this reciprocal dynamic, furnish comprehensive insights and simultaneously invite them to invest time for an in-person rendezvous. This approach underscores your commitment to meaningful engagements.

Treat First-Time Buyers and Previous Business Owners Differently

First-time buyers exhibit promising potential, provided they proceed to action. Evaluating their risk tolerance, however, remains a complex endeavor.

Experienced buyers, having navigated business ownership, are well-versed in decision-making amid incomplete data. This comfort zone drives their likelihood to extend offers on enterprises. Such seasoned entrepreneurs are also cognizant that the perfect business does not exist.

Conversely, employees often lack the comprehension of business ownership intricacies and seldom operate with the “gut feeling” or partial information decisions demand. Their aversion to risk might surpass that of seasoned owners.

Screen Buyer’s Tolerance for Risk

Evaluating the risk tolerance of a first-time buyer poses challenges, but a straightforward test exists for gauging their capacity for risk. A highly motivated buyer possesses the strength and determination to conquer their apprehensions, ultimately mustering the courage to extend an offer. Given that any business acquisition entails a measure of risk, accompanied by fear, it’s imperative that a buyer confronts these uncertainties.

After several meetings with a buyer, during which they seek increasing amounts of information about your business, a potent strategy for assessing their risk tolerance and fear-confronting ability emerges: prompt the buyer to submit an offer. Those ready to take the leap will step forward, while those more risk-averse will succumb to fear and fade away. Confronting this fear head-on is essential for a buyer to progress in the journey of business acquisition.

Avoid Buyers Looking for the Perfect Business

Be cautious of buyers whose pursuit is to acquire the “flawless” business and eradicate all forms of risk. Such buyers will seldom proceed with a purchase.

This type of buyer is easily recognizable, yet challenging to define precisely. Their traits become evident upon encounter. They’ve scoured the market for three years, reviewing over a hundred businesses on sale. While they might initially show immense interest in your business, they’ll repeatedly request meetings, only to back out at the last moment when they perceive your business as less than “perfect.”

Engage with these buyers by enlightening them on the nonexistence of a flawless business. Share your own experience of holding similar perceptions before becoming a business owner.

Address the buyer’s apprehensions openly. Extend empathy, while also urging them to take the decisive step. Limit your interactions with the buyer to three or four meetings, unless they present an offer for your business, which serves as the ultimate litmus test.

Avoid Buyers Who Have Been in the Market for Too Long

Buyers need to identify a business and extend an offer within six to 12 months. The closing process should ideally take place within a year from the start. If a buyer has exceeded the one-year mark in their search, potential issues may arise. In some cases, we encounter buyers who have been searching for one to two years, but we typically advise against considering those who’ve exceeded the two-year mark. The one to two-year range is uncertain, while a buyer surpassing two years raises concerns.

Table of Contents