As business brokers, protecting the confidential business information of our sellers is our top priority. One of the ways we do that at Green & Co. is to screen the buyer inquiries that we get on our listings. This is in addition to having potential buyers sign a Non-Disclosure Agreement and fill out a Buyer Questionnaire first. It is common practice for our brokers to call a buyer who has shown an interest in learning more about a particular business. Before we disclose any of the confidential business details, buyers need to be prepared to satisfactorily answer our questions. We are going to ask buyers about the “3 M’s” as we call it: money, management, motivation. So, any buyers who want to make it past these gatekeepers will have to supply us with strong, specific, and convincing answers to our questions regarding the 3 M’s. We want potential buyers to be prepared for these questions, so here we will go into more detail about what we are looking for.
The first thing we need to establish with any potential buyer is whether or not they have the funds to complete the purchase. If you are paying cash, then we’d need to make sure that you have enough to get the job done. In the case of SBA financing/bank lending or seller financing, we’d need to make sure that you have enough for the down payment. In many cases the seller has instructed us to verify this by requesting to see “proof of funds.” Proof of funds would be in the form of a bank statement, investment statement, or a letter from the bank stating that the account holder has sufficient funds to complete a purchase in excess of (whatever dollar amount is required). Of course, account numbers can be redacted, but the name needs to match the buyer making the inquiry on the business. This is becoming more and more common in today’s competitive seller’s market, because a seller doesn’t want to waste their time on a buyer who doesn’t even have the money to close the deal in the first place.
We will ask about the plan to pay for the business. Will there be a loan involved? Will you want to request some seller finance? Are there investors involved? We need to know the specifics here, because the structure of how a buyer intends to pay matters. Some businesses won’t qualify for a commercial loan (usually due to the purchase price being below the lender’s acceptable threshold of what they will work with, messy books or too much cash in the business), and we usually know whether or not that is the case right in the beginning because we attempt to get all of our listings lender pre-qualified before we even go to market. Sometimes, the seller is not willing to entertain seller financing, so that would be a no-go there, so we can save everyone time on that one if it’s an absolute necessity for a buyer.
If the potential buyer is an investor, we will need to know what type of investment company you are, how your acquisition process works, and the specifics of exactly where the money comes from. If buyers can’t give us the answer of, “How much money do you have to spend and where is it coming from?” then we won’t be able to supply them with the confidential business information. It’s really that simple. So buyers, if you are genuine in your interest in a business you inquire about, at all costs, avoid being vague, cagy, or defensive when we ask you about money. Buyers who react that way put up all the red flags immediately, and ultimately hurt their position. Buyers who are upfront and honest with us about their financial situation are going to get the best results.
The next thing we are going to ask a interested buyer about is their plan to run the business. Will they be an owner operator? Will they bring in a manager to run the business? Are they hoping that the current owner will stay employed after the sale to run the business? Are they going to be relying on a key employee to step into a management position? The potential buyer should have already thought about this aspect of owning the business and have a plan for it.
So, buyers spend some time preparing your answer to this one, especially if you are an investor. The seller wants to know that their business will be in good hands once they are gone, and this question is key to finding out if the buyer is a serious one or not. If the buyer hasn’t even thought about what their plans are for the business post-closing, then that is a sign that they either aren’t serious, have no idea what they are doing, or don’t really have the capacity to run a company. So, make sure you have a plan in place for owning and managing the business, if you want to be taken seriously as a buyer.
Buyers, be prepared for us to ask “Why are you interested in this business?” We want to know what your story is. Why are you purchasing a business in the first place? If you are an investor, we will ask you how many businesses you have purchased in the last year, and maybe in the last 24 months. We will ask about your timeline to purchase too. Essentially, we are trying to gauge how serious a buyer is, and buyers with specific and confident answers will be more likely to make the cut here. Finding out about a potential buyer’s motivation is a key factor in determining if you are a fit for this business opportunity or not. So, again, buyers, you will want to make sure that you are prepared to answer this question with a good story, accurate details, and genuine interest.
Asking about motivation also helps us identify if the potential buyer is a competitor. If you are a competitor with a genuine interest in growing and your intentions to get the confidential information on this business are for the sole purpose of evaluating it for acquisition, then be ready to supply us with some specifics. We will need to know what the name of your business is and where it’s located. We will then need to get the seller’s permission in order to share the details of their business with you. It is an extra step, but we do need to get the seller’s blessing in the case of a competitor inquiring. Sometimes competitors can be the best buyers for a particular business, but we need to make sure that the competitors motivations and intentions are genuine in nature. As with every buyer who wants to receive the confidential details of a business, we try to ensure that only serious buyers, with enough money and the right motivation get through the door.