Why Buyers Need To Stand Out In The Business for Sale Marketplace

Regardless of the economy, the business for sale marketplace is still flooded with buyers. One of the points I have been preaching for years is that serious prospective buyers have to separate themselves immediately from all of the lookers when they contact sellers or brokers.

I received an email inquiry this week about a business for sale that I am representing. The buyer’s email simply stated: “Please send me the company’s recent financials”. It reminded me how many uneducated and poorly prepared buyers there are out there. This lack of knowledge, and moreover, most buyer’s unwillingness to acknowledge it, has been one of the most frustrating challenges I have faced in my career. It never ceases to amaze me that people can be so illogical to believe they’re going to successfully navigate their way through the business buying process and make all of the key decisions along the way, even if they have never done so before.

Although my company sells an incredible amount of guides on buying a business, there are times when I have been tempted to post some “in-your-face” copy on our website and tell buyers: “You are completely out of your mind if you think you’re going to buy a good business and negotiate a great deal without the right information and advice.” Maybe I should test it?

Anyways, let me get back to the email inquiry. My first reaction was to think “here is someone who has absolutely no experience buying a business.” If you are a prospective buyer, think about how such an inquiry is taken by the seller or their representative? If you were in their shoes, would your first action be to hand out your financials to anyone who sent you an inquiry? Of course not!

Whenever I get an inquiry from a buyer complaining about sellers or brokers not responding to them, I always ask what question they submitted on their first inquiry. In the majority of cases, the buyer requested detailed information (i.e. the financials, business address, how long on the market, etc.) and while these are valid requests, the timing is off. Moreover, most sellers or brokers will react as I did, and label you an amateur or more likely as someone who has no clue what they are doing.

Naturally, I emailed the buyer and informed them of the proper steps to take and we got right back on track. But if you make this same mistake to a seller or broker who is getting a lot of inquiries, it is possible you will never get a reply. 

So lesson number one when you first contact the seller, is to simply note: “I am interested in this business. Please send me the necessary non disclosure and any additional documents to complete so we can discuss it further”. That is all you should be requesting.

If you have never signed an NDA , they are generally fairly standard but certainly feel free to have your attorney read it. Also, get familiar with the contents of these documents, and learn what the various clauses mean, so you can quickly review them in the future and not be forced with having to pay your attorney to look at each one.

A few of the key elements of any Non-Disclosure will be:

• Identifying the business either by description or listing number.
• A stated term for the Agreement (usually 2-3 years).
• An acknowledgment to keep all information confidential.
• Your agreement to not circumvent the broker or contact the seller or any of their employees, customers, or suppliers directly.
• An agreement to destroy any documents upon request from the seller/broker

The only issue to really look out for is that the form must only cover the specific business or businesses identified on the document. Some forms provide a broad coverage to the broker for their other listings which you should not execute.

When you receive these from brokers, sign and send them back quickly. It demonstrates you are serious.

Next, set up a call with the broker (if one is involved) or the seller directly. Don’t come charging out of the gate like a pit bull. Don’t expect them to disclose reams of confidential information. All you want to do initially is get a good overview of the business to get a sense if you may be interested and to tell them a bit about yourself.

It is normal for the other side to dig into your financial situation. While you do not have to provide great details initially, it is only reasonable that when the time comes that you want to look at the company’s financials; you have to be prepared to provide yours to the other side as well. A refusal for a buyer to provide their financials simply sends out one very clear message to the seller side that you don’t have the money.

Interestingly enough, in the nearly twenty years I have been in this game, I have found that buyers who have the money, are never afraid to show you it is available. Here is a past post you need to read if you have any apprehension about providing your financials (read it here)

I realize that many people may not be in the same financial position they were in the recent past. But if you are spending your time searching for businesses and don’t want to waste it, then make certain you put yourself above the crowd of tire-kickers by being a well-informed, properly prepared  and knowledgeable buyer. If you try to fake it, you are only fooling yourself.

Comments

[Prince Saud Ibn Abdulaziz]

Buying a business is less complex than this summary suggests. Easily, if the owner(s) stay on for
one quarter with you personally present all
days in all departments etc. First hand you know
all facts and observe real time economic activities.
You will visit and meet with major accounts, and all
greater than 90 days due trade credit clients.
Mere P&L, balance sheet, cash flow projects, captial
asset written descriptions etc. become knowns.

[cc]

The unpreparedness goes both ways.

Recently i spoke to a broker who after several phone conversations about a business (he knew i was serious) could not provide me with info like break down of revenue sources, there were 4, some a lot more profitable than others. He also would not let me talk to the owner unless i made an offer and signed offer letter.

How was i supposed to make an offer if i cant even calculate how much the business is making?

[Leon Parker]

Richard:

Thanks for another really good article.

I had an inquiry this week from a customer who stated that he had filled out the address and phone number information in his inquiry with false information, because he was only going to tell us where he was after he reviewed information about our listing and decided he was interested.

I suggested in a response to him that it was hard for me to work with someone who had not told me the truth. He took great offense at my suggesting he was a liar.

After over 20 years in the business I am still amazed at the games customers try to play, and stand by my statement to him that I find it hard to work with folks who don't tell me the truth.

I find a very frequent answer when I ask people what they have for financial resources is "It depends". That one always leads to a further discussion, during which I end up telling them that unless I know what they have to work with I don't know what businesses to expose to them. That discussion often also includes my explaining to them that my responsibility is to my client, who does not want me exposing the business to unqualified customers.

Over the years I have always found that serious real buyers will level with me right up front about what they are working with for money, where they want to be geographically if that is an issue, as well as who they are and what their background is. Until that discussion they are just customers, being screened to see if they might be buyers.

Leon

[Joseph Warner]

Richard, I agree with 98% of what you say, and timing is apt. I received NDA's from 2 PEGs on deals I represent - I singed & returned within 12 hours - the other after 4 days and marked up beyond recognition and illegible. Guess which group received information?

For individual buyers, I am curious about your advice to not sign a "blanket" NDA, however. Ours does cover any business we represent, and allows me to provide information on more than one business without additional paperwork. As I'm sure you know, individual buyers - most often first-time buyers rarely if ever buy the first business they look at. Often the one they buy doesn't even resemble the first one they inquire about. Incidentally, I insist local individual buyers come to our office and meet face to face the first time, to understand their real goals, and to help them understand the process.

I'd be interested in hearing your rationale against the blanket NDA from the buyer's perspective.

Joe

[Robb]

This is very good advice and, as a new broker, helps me greatly as I was letting prospects run the show. You might have already provided this somewhere, but what information and in what order should you provide the prospect? I'm thinking you don't let the prospect ask for anything and just provide it right away. Obviously it diffrent each time, but would it be something like:
1. brief description of the business, possibly slightly more detailed than what is in the listing.
2. NDA
3. List of assets, inventory
4. Sit down meeting
5. FAQs
6. Financials