Qualifying Buyers When Selling a Business
A while back, I posted a blog that briefly discussed why business brokers ask for a potential buyer’s financial information before releasing even the name of a business that is for sale. In short, it’s our obligation to the seller to only release their confidential financial information to someone who has the ability to make the purchase.
Even after a buyer provides information that would indicate his financial ability to make a purchase, business brokers and sellers may indeed ask for further proof of funds, especially if you’re at the point where a LOI (letter of intent) contract is in place. Buyers may feel uneasy about this, but it’s not much different than purchasing a house—real estate agents and sellers usually request a pre-qualification letter from a bank. When buying a business, there is the same type of risk for the seller.
Years ago in a transaction, a buyer inquired about a listing. He completed and returned his buyer documents (a confidentiality agreement, an agency disclosure, and a buyer profile). After receiving initial information on the business, this buyer flew into town, met with the sellers and promptly submitted an LOI followed by a contract. However, when it came time for the transfer of funds at closing, problems arose. Funds weren’t as readily available as was stated.
The end result is that the closing was not completed. The buyer walked away, and the seller suffered. Time, energy and money were lost in what was thought to be the final steps in the sell process. Time is important in all aspects of life, especially in business transactions. No one enjoys having theirs wasted.
Situations like the above result have led to the need for increased buyer qualification. This includes steps in addition to having a confidentiality agreement and an initial buyer profile. For both the seller and the buyer, it is important that each party has faith in the other that the time and energy put into a transaction end in a successful close.
Sellers will want to interview potential buyers in terms of their financial ability to make the purchase, as well as about buyers’ skill sets and compatibility with the business itself. If sellers are considering financing part of the sale, they will want to do a credit check and/or a background check on buyers. If third-party financing is in play, buyers should expect to obtain and show proof of funds prior to getting too far into the process.
Buying or selling a business is one of the biggest decisions one can make. We’ve said it before: Sometimes the process can be incredibly smooth, and sometimes there may be bumps in the road; but if there are steps both parties can take to help get to a win-win closing, it’d be worth it!