As a business owner it can be very exciting when you are contacted by a potential buyer for your business. Sometimes this can happen when your business isn’t even on the market.
It is essential to be careful when you are dealing with a potential buyer for a number of reasons. You don’t want to give away valuable information which could potentially devalue your business, for example trade secrets and, very importantly, you don't want to waste your time.
There are many aspiring business owners in the community, but many of them will never be business owners. They either don’t have the skills, expertise, or courage to own a business. It is these people that will steal your time.
Many potential business owners have heard or read about people being able to buy businesses with little or no money down, with the seller providing all the finance. Well let's be honest, unless you are a desperate seller and you have complete confidence in the person buying your business, it is not going to happen. And even if this is the case, it is highly likely that the buyer has some skin in the game, generally in the form of money. This is why it is important that you are able to qualify a potential buyer for your business.
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Remember you are going to be investing your time in sharing information about your business, and much of this information would not normally be available to people you don’t know and trust.
Here are seven questions you can ask to help you ascertain whether or not the person you are speaking to is a potential buyer for your business:
1. What kind? How big?
A serious buyer would have done some critical thinking about the type of business they want and why they want it, as well as the size of the business. The size of business may be in terms of turnover, profits, number of staff or selling price. If they say they are looking at all types of businesses or if your business falls outside of their range, then this is a potential warning sign that they may not be serious.
2. How soon?
If they do not have a time frame, then there will be no urgency. They will rush you for information and then you will be left waiting. If this is the case, it would be a good idea to set some very clear expectations. For example, you may say, “If I give you this information by this date, then would you commit to coming back to me by a certain date?"
3. How long have you been looking?
There are professional "want-trepreneurs." In other words, they want to be an entrepreneur but never get round to pulling the trigger and doing the deal. These people can be massive time wasters. Initially they seem like good candidates asking all the right questions however in reality that's all they have got good at doing ... asking questions!
4. What did you do before?
Depending on your business, this question will have different levels of relevance. As a seller it’s ideal to be realistic about the level of experience required to successfully run your business. If you don’t, you will find the deal falling over in the final stages when the buyer has the sudden realization that they do not have the necessary skills. Knowing what skills a person needs upfront will help you negotiate a better deal. You may for example include additional training when negotiating the deal or even invest in additional systems making your business less dependent on these specific skill sets.
5. How is that going to help you run this one?
Being in your industry, you may take having the right qualifications for granted or assume that the buyer knows what qualifications are required. If a potential buyer does not have the necessary qualifications, you may be able to solve this by making sure you have staff that have the relevant qualifications and have an incentive to stay on.
6. How deep are your pockets?
Yes, this is the prickly question but at the end of the day, an important one. If they do not have the means to buy your business you are not going to have a deal, unless you want to finance the deal and take in all the inherit risks.
7. Can you show me?
This is the ultimate pre-qualifying question. It is amazing at how many potential buyers have no idea about how much money they can borrow or actually have access to. A serious buyer will be able to show you that they have access to the required funds. A relatively easy way to do this, is for the buyer is to provide a letter from their financial institution or accountant that shows they have the funds required to purchase your business. If they refuse to forward you a letter of ability to pay or do not have the funds, you may quickly delete them from your list of potentials and move on.
If people are not willing to provide answers to these questions, you have the right to be very wary. People who are serious about buying a business and who expect you to share confidential and sensitive information about your business are more likely to oblige. Over time, the answers to these questions will become apparent; however, all too often considerable time is wasted on dreamers, tire kickers, or even sneaky competitors.
Having a good solid pre-qualifying process will potentially save you a lot of time and emotional heartache. Remember you only need one buyer for your business.