In my last post, I discussed the importance of qualifying buyers when selling a business. The two-tired, gated approach I outlined is a great way to provide maximum exposure for your business while protecting your confidentiality and sensitive information. It keeps all parties on equal footing while allowing you to identify a subset of your best prospects. In my previous post, we also covered checklists of what questions to ask for identifying the best potential business buyers.
But collecting data on prospective buyers for your business isn’t always easy. Some buyers may be reluctant to answer your questions or even downright uncooperative. Other buyers may give vague and incomplete responses that are difficult to put together into a complete picture. Many buyers are first-time entrepreneurs and may not even be sure how to answer your questions. And some questions are, frankly, intimidating to ask.
So, today I want to cover these and some additional challenges that sellers face when collecting information about prospective buyers for their business. We’ll go over the strategies I use for making the qualifying process as efficient and painless as possible, while still achieving an end goal of helping my client make an informed decision. We’ll also review what details I share about the business with a prospective buyer, and when.
Tip #1: Use a Qualified Intermediary to Find and Reach Out to Buyers
The best way to handle the process of attracting and establishing a rapport with potential buyers is to engage the services of a qualified business intermediary. If you are selling your business for the first time, you’re not alone, but it’s important to have a professional to guide you through it. The right intermediary will make selling your business easier, more profitable, and can save a great deal of time and stress while fully protecting your interests.
Tip #2: Let Your Intermediary Ask Your Questions
It’s often better to allow your broker or intermediary to ask many of the key questions you have for a potential buyer. Some questions can seem blunt or invasive and there’s often a fear on the part of the seller that asking for certain private details may scare the buyer away. The intermediary can also present questions the buyer may have for you, and can make recommendations on how much information you should disclose.
Tip #3: Don’t Reveal Sensitive Business Details to Un-vetted Prospects
The approach I use to broker a business sale is to speak with each buyer after they have answered the questions from the Gate 1 checklist. In fact, I require any buyer to respond to all key questions before I will provide them with any information about the business being sold. After I have some basic information about the buyer and their responses to the questionnaire, I make a determination about which initial details to provide that will engage their interest.
Tip #4: Tailor the Due Diligence to Your Selling Price and the Buyer’s Background
As you know, there are different types of buyers in market to buy internet businesses. If the buyer is qualified, I base the due diligence that I do with the prospect around the selling price of the business, the seller’s specific requirements for the sale, and the seller’s expectations of an “ideal” buyer profile.
For small businesses valued at less than five hundred thousand dollars:
If the selling price of the business is less than a few hundred thousand dollars, it is not uncommon to find buyers who are capable of paying the full purchase price in cash. So, in these cases, my follow-up questions for the buyer revolve around their personal assets, their ability to raise the cash to meet the purchase price, and their sources of funding — particularly if they are planning on obtaining outside financing.
Banks can be difficult to work with when financing the purchase of an online businesses, so I tend to be cautious with prospects who plan to raise capital through a traditional method like a bank loan. l advise my clients to continue working with such buyers if there are no other better funded prospects available, but I recommend they disclose the information needed by the buyer’s financial institution without committing to a sale. The underwriting process, after all, can drag out for weeks or months, and it is not uncommon for a funding bank to provide far less capital than the buyer expected.
As a seller, the initial unwillingness to commit may seem like a way to drive buyers away, but due diligence through an intermediary can help the buyer understand the circumstances while avoiding any potentially dangerous commitments or agreements.
For larger businesses valued at over five hundred thousand dollars:
For larger businesses with asking prices of up to several million dollars, the ideal purchaser is usually a successful e-commerce chain operator with deep pockets, or a private investment firm. Established e-commerce chains are usually very familiar with the buying process and will often have the necessary credentials prepared before negotiations even begin. Private investment firms, however, are a little like individual buyers — it is important to understand who they are and their goals before proceeding.
Private investment firms looking to buy companies in the one-to-ten million dollar range are often comprised of individual investors, each of whom has a substantial net worth. By pooling their assets, these firms can generate large amounts of capital that are then used to invest in business opportunities. The goal of these firms is then to improve the earnings or revenue potential of the companies they buy, and then to resell them to other investors at a profit.
For investment firms, then, due diligence should focus on determining how the firm is funded while verifying that all partners are in agreement to buy your company. They will need to share their full financial profile, along with proof of funding, to prove they are capable of meeting your asking price — just as with individual buyers.
Tip #5: Always Keep the End Goal in Mind
Your end goal is to maximize your selling price. Exchanging information with a prospect and finding the right buyer is always a balancing act. In fact, selling a business, especially one you started and grew on your own, is a psychological transaction as much as it is as a financial one.
It may seem obvious that you’re keeping the goal in mind, but in the midst of all the phone calls and document transfers and investigations, it’s actually easy to lose sight of your objective. Keep a professional attitude and an open mind, be thorough and fair, and use an intermediary if you need one (most people do), and you’ll overcome these challenges and ensure a successful transaction.