Process for Screening Buyers When Selling a Business
Just as you meticulously research potential buyers and assess their compatibility with your business, conducting a thorough evaluation of buyers is equally imperative.
Among the initial and pivotal stages of the sales process, none is as time-intensive yet as crucial as screening potential buyers. Emphasizing the significance of this screening process cannot be emphasized enough.
During the nascent phases of a transaction, a common misstep made by many entrepreneurs is directing their efforts towards unqualified buyers and prematurely evaluating offers devoid of comprehensive insights into the buyer’s background.
Prior to investing your valuable time and efforts into negotiations with prospective buyers, it’s imperative to establish their genuine motivation and financial capacity to acquire your business. By doing so, you ensure that your negotiation efforts are channeled towards genuinely qualified buyers, propelling you to invest further dedication into the process.
It’s important to note that individuals without sincere intentions are unlikely to commit to the meticulous completion of a comprehensive buyer profile and personal financial statement. Thus, the screening process inherently acts as a filter, effectively sieving out those who lack genuine interest. Upon the submission of an offer, buyers should be prepared to provide source documents verifying their financial capability to finalize the transaction. This step substantially enhances the thoroughness of the buyer’s screening.
Efficiency lies in eschewing efforts directed towards unqualified buyers.
Part of your initial due diligence entails gauging the buyer’s level of motivation. When engaging with potential buyers, consider the following:
- How evident is the buyer’s enthusiasm?
- Do they promptly respond to your communications?
- Does their disposition reflect eagerness to progress, or is it laden with undue criticism? Notably, overly critical buyers often indicate a lack of sincere intent to purchase a business.
While the process may exhibit nuances based on whether the buyer is an individual, a company, or a private equity group, the core approach to screening remains steadfast. The strategies for screening an individual buyer distinctly differ from those employed for a corporate entity.
This article comprehensively addresses the following inquiries:
- What constitutes a methodical screening process?
- What forms the cornerstone of screening a potential buyer?
- How swiftly can closure be anticipated once a buyer is identified?
- When should tax returns and bank statements be shared with potential buyers?
- What recourse is available if a buyer resists the screening process?
- Is a verbal affirmation of financial qualification from a buyer acceptable?
Reasons for Screening Buyers
- Shouldering a portion of the sales price’s financing compels you to approach buyer screening with the same meticulous scrutiny as practiced by financial institutions.
- Your aim is to ascertain their eligibility for the lease, all while respecting their time. In scenarios where the seller endures responsibility on the lease as a guarantor, a prudent course of action involves verifying the buyer’s qualifications, minimizing the potential for lease defaults.
- Moreover, it’s essential to verify their alignment with prerequisites governing franchises, licenses, or any other conditions mandated by external entities.
- Prior to embarking on an extensive due diligence journey, safeguard your commitment by confirming the buyer’s possession of the requisite cash down payment. Recognize that due diligence signifies a substantial investment for sellers, with potential costs ranging from thousands to tens of thousands of dollars in advisor fees paid to legal experts, accountants, and other relevant parties. Ensuring the buyer’s financial capability becomes an integral step for any astute seller, validating their readiness to engage before dedicating resources.
- Even if the buyer opts for an all-cash transaction sans third-party mandates, the specter of fraud and theft remains an ever-present concern. Granting access to sensitive data, including bank statements and tax returns, demands a comprehensive screening process, fortifying sellers with the confidence that their interactions are with bona fide entities.
Use a Phased Screening Process
Employing a phased screening process entails a strategic approach to buyer evaluation, carried out in well-defined stages. This approach is rooted in the understanding that comprehensive screening might deter buyers during the initial stages, especially before they’ve had the chance to acquaint themselves with your business and develop a keen interest.
For instance, requesting financial statements, tax returns, and other sensitive documents early on often meets resistance from buyers. The remedy lies in a progressive approach, gradually soliciting the necessary qualifying information as buyers advance through the distinct stages of the purchasing journey.
This gradual release of information yields multifaceted benefits—it optimizes time utilization, safeguards confidentiality, and precludes furnishing unqualified buyers with sensitive business insights.
Our preliminary step to gauge buyer commitment involves soliciting the signing of a non-disclosure agreement (NDA), a comprehensive buyer profile, financial statement, and disclosure statement. Upon completion of these prerequisites, buyers gain access to the confidential information memorandum (CIM).
Should a buyer express sustained interest upon reviewing the CIM, they may choose to:
- Initiate a face-to-face meeting to further discussions.
- Seek additional information (such as detailed financial statements) before progressing to an in-person interaction.
Should the buyer decide to extend an offer, a deeper level of personal information becomes requisite. This includes an elaborate financial statement, a buyer disclosure agreement, bank statements, tax returns, and more.
While the majority of this information is usually exchanged post-offer acceptance, a segment may be shared earlier, particularly when the seller plays a role in financing a fraction of the purchase price. This approach empowers the seller to gauge the buyer’s financial reliability before committing to a seller-financed note.
When selling a business, the process unfolds as follows:
- The buyer completes a non-disclosure agreement (NDA), buyer profile, financial statement, and disclosure statement.
- The buyer gains access to the CIM.
- The buyer can request more documents, like financial statements, pertaining to the business or arrange a meeting with the seller.
- The buyer submits a letter of intent (LOI).
- The seller assesses the buyer’s information and either accepts, rejects, or proposes revisions to the offer.
- Upon offer acceptance, the due diligence phase commences, entailing an additional exchange of pertinent information. This might involve background checks on the buyer, engagement of professionals for buyer investigation (in case the seller carries a note), or procurement of supplementary financial documents (occasionally mandated when a note is involved, either from the seller or a bank).
Should I immediately share the CIM with a buyer once they sign the non-disclosure agreement?
Absolutely, we recommend promptly sharing the CIM with buyers. Most buyers anticipate receiving this shortly after signing the NDA. Sending a professionally curated package about your company right at the beginning is crucial, as it often influences their responsiveness to subsequent emails.
What’s the typical timeframe for closing once I’ve identified a buyer?
On average, it takes about two to four months to finalize the deal after the acceptance of an LOI. While some transactions have closed within a month, others have extended beyond six months. Typically, one to two months are allocated for due diligence, followed by another one to two months for the actual closure post-due diligence. Delays can occur in cases involving third-party financing or unexpected complications.
What’s the best course of action if a buyer requests access to tax returns?
Inform the buyer that tax returns, bank statements, and other sensitive documents will only be disclosed after an offer is accepted, during the due diligence phase.
How should I handle a buyer who resists screening?
It’s advisable not to invest your time in such a buyer. Remember, the sales process is lengthy, necessitating a cooperative and pragmatic collaborator, not just someone willing to meet your price. Such buyers frequently deviate from their initial agreements, leading to deal breakdowns. They may resort to threats of legal action or divulging the sale to competitors. Time spent on such buyers is often futile. Seek a more cooperative partner who can contribute to a successful deal. Keep in mind that transactions thrive on cooperation between both parties. If a buyer displays inflexibility, it’s wise to explore other options.
How to address a buyer who refuses to furnish financial statements or information?
Consider this a warning sign. Dealing with such a buyer might not be productive. Generally, it’s unadvisable to share information with a buyer who’s unwilling to provide any details about themselves. Even if they possess the necessary qualifications, their refusal to complete a basic form denotes uncooperativeness, hindering the transaction’s progress.
Is it advisable to accept a buyer’s verbal assurance about their qualifications?
While you can inquire about the buyer’s investment capacity, credit score, and net worth verbally, it’s highly recommended to secure these details in writing as early in the process as possible.
Should we validate the information provided on the NDA?
No, verification of every buyer’s information is impractical at this stage. Experience shows that a small fraction of buyers might provide inaccurate details. Conducting such thorough verification upfront could potentially deter buyers. The screening process operates in stages—more information is released to the buyer as you request information from them. This naturally provides an opportunity to verify their details.
Could a buyer potentially provide false information on their financial statement?
While there’s always a possibility, serious buyers are less likely to do so, especially when they’re asked to sign the document. When an offer is made, the option to request source documents, like bank statements, exists. Buyers understand their representations will be validated during the process, deterring most from providing false information.
Are there alternative ways to research a buyer?
Perform a quick online search using their name, phone number, and email address to uncover any relevant information.
The buyer mentioned having an investor. What’s the appropriate course of action?
Ensure the investor undergoes pre-screening, considering their access to your business’s confidential data. The investor should sign the NDA and complete the qualification forms.
I’ve attempted to contact the buyer via phone and email without success. What’s the best approach, and how many follow-ups are reasonable?
It’s unnecessary to chase after a buyer excessively. A maximum of two or three follow-ups is recommended. A motivated buyer should willingly engage with the process. If you find yourself consistently pushing or chasing a buyer, their commitment to completing the sale is questionable.
What’s your top advice when dealing with buyers?
Operate your business under the assumption that you’ll never sell it. Avoid fixating on a single buyer. It’s easy to get consumed by one potential deal to the detriment of your business’s performance. Allocate time to buyers but maintain your business focus. Engage respectfully with buyers, cater to their needs, but keep your primary attention on running your business until the deal is finalized.