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Qualifying Buyers: Separating the minnows and sharks from the keepers !
You've run some intriguing ads that don't divulge your business
name or specific product line (or even your location, unless you
are looking for a local buyer) - and you've received a good number
of replies from your ad - now what ?
The next step is to qualify buyers. You'll find that your ads
attract sharks (who are looking for weak businesses to prey upon
and buy at a bargain price), minnows (little in the sense of having
little money to invest) and keepers (legitimate prospective buyers).
Wannabes - Typically have little or no money or
business management experience.
Bottom Fishers - Wannabes or savvy business people
only looking for a business they can buy at a fire sale,
bargain basement price.
Curiosity Seekers - People in the industry who are
trying to figure out who is selling. These might be competitors,
suppliers, employees or customers.
Brokers and Sellers of other Services - An ad may
bring some responses from people trying to sell you something.
Sharks - May be legitimate buyers, but many are looking
for weakness and a quick, low buck deal. Sharks are like bottom
fishers but more cunning.
So far, things look pretty bleak. These aren't very good prospects !
Here are some better prospects you'll find in your replies:
Business Buyers - Companies who are looking for strategic
acquisitions.
Investors - Individuals or groups with money to
invest in buying a business. These are financial buyers and will
often hire a professional manager (possibly the former owner) to
run the operation.
Career Changers - Individuals, usually middle-aged,
who have experienced success and built up some savings but are
disenchanted with their current job and want to be their own boss.
These aren't "wannabes" if they have enough experience to have
a shot at successfully running your business and the money to buy it.
Confidentiality Agreement and Background Statement
Obviously, you will discard the replies from people trying to
sell you something. Also, anyone that you recognize as a member
of your industry should be set aside for individual consideration
on a case-by-case basis. But the rest of the replies should receive
a Confidentiality Agreement to sign.
A Confidentiality Agreement is a contract in which the buyer agrees
to be very careful with any information you provide to them. It is
a legal agreement and it's a good idea to have your attorney review
whatever agreement you choose to send out.
Nearly as important as the Confidentiality Agreement is the background
statement you should ask prospective buyers to provide. In response to
their reply to your ad, you should fax a Confidentiality Agreement form
along with a short cover letter. You should not divulge your company's
identity at this point. In the cover letter, thank the respondent for
their interest and ask them to sign and return the Confidentiality
Agreement. In the letter, also ask them to describe their background
and the reason for interest in buying a business. Also qualify buyers
financially by including a phrase such as:
(1) "Please indicate if you have resources available to finance
a business purchase of $ (your asking price)",
- or -
(2) "Please indicate the approximate size/purchase
price of business you are seeking to acquire".
Don't be too terse in your language - the idea isn’t to scare
them away, but to get an idea of where they are coming from.
Not all of the people you respond to will return a signed
Confidentiality Agreement, so you'll eliminate some curiosity
seekers right there.
You can learn quite a bit from the replies you receive. Look at
the level of professionalism of the response - is the response
typed or handwritten ? Is it on blank paper or letterhead ?
Carefully worded or written sloppily in a hurry ? If it is a
business, what is the name and location of the company ? The
background statement will often tell you much about the person’s
experience, which is a big help in qualifying a buyer.
Worried About Unqualified Buyers ? Use a Mini-Selling Memorandum First
After sifting through the Confidentiality Agreements and background
statements, separate them into an A, B and C pile. The A replies
are those that look like business buyers or investors. Put the ones
that look like sharks and bottom fishers in the B pile. Also
include the ones you're unsure of - they might be A prospects but
you're uncertain - in the B pile. The C pile should be curiosity
seekers, competitors, suppliers and those who are definitely wannabes.
Use your best judgment but don't dwell on this too long - there
isn’t much information to go by, so you are bound to misjudge
a couple of replies. If you're really uncertain about a particular
reply, call them up and chat to learn more about their background.
If someone uses the opportunity to start drilling you with specific
questions, say that you're not comfortable providing that
information yet, but a selling memorandum will be sent to them.
If you are concerned about releasing too much information to buyers
who may not be qualified, you may first want to send a mini-selling
memorandum to the A and B prospects. (The C pile replies get nothing.)
This is a 2 or 3 page memo summarizing your business (including
name, address and contact information). It should be an upbeat
description of the company and its main business. Give sales and
profit information in general terms (example: sales of
approximately 5 million dollars last year with about $400,000 EBIT).
If sales and/or profits are trending upward, be sure to mention
this, and use a chart or graph if there is a multi-year trend that
tells a good story. Also important is to state the form of the
company (Private or Publicly Listed Corporation, partnership,
proprietorship) and the terms and approximate price you are asking.
For example, "Current owner is asking $2 million with at
least 50% payable in cash at closing." If your company is
Incorporated, indicate whether you are seeking a stock or asset sale.
Stating the price and terms is important - it will go a long way
in eliminating many of the bottom fishers and the wannabes that
slipped up from the C pile into the B pile by mistake.
Note: Many sellers prefer to skip the mini-memorandum and just
send out the standard one on the first go-round. If you're not
overly concerned about releasing data about your firm, it's OK
to do that.
Follow-Up With the Big Selling Memorandum
In a cover letter with the mini-selling memorandum,
ask buyers to call or fax you if they want more detailed
information. If you don’t hear from them within a week, call
those who didn’t respond. Try to get their honest feedback -
try to determine if there's a specific point that is spooking
people. You will probably get a few bottom fishers who say your
price is way out of line, and don’t worry about them. But if you
get few replies from your mini-memorandum and a large percentage
tell you that your price is much too high, reconsider your asking
price.
Now, send the big selling memorandum to those who are left
(it's a good move to send your top prospects their books via
air - it lets them know you're serious). Again, include a cover
letter asking them to call you within a week - one way or another,
as a courtesy. Follow up by phone if you don't hear from them.
Your Confidentiality Agreement should have specified that buyers
return all information they received if they are not interested,
but remind those who are no longer buyers that you want your
selling books returned ASAP.
Hopefully, you now have a solid number of qualified buyers
with selling memoranda. The next step is a Letter of Intent.
About the author: James Laabs is an experienced business
seller and author of the book The Business Sale System:
Insider Secrets To Selling Any Small Business
This Article is copyright © 2006 Business Sale Center
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