How to Qualify Prospective Buyers

This how-to guide covers qualification of buyers as firm prospects and the subsequent refinement of these down to a short list. It works in conjunction with two other guides namely, Respond to and Communicate with Prospective buyers and, 10 Top Tips when Negotiating Your Business Sale.

It’s important to remember that buyers will probably have a choice of businesses to buy. Asking good probing questions will help you to find out where your business ranks in their preference, and the criteria they are using to assess the alternative opportunities.

In the end you seek to narrow the field to a single prospect, that is your preferred candidate. Once your favored buyer has signed a Letter of Intent to buy your business the real negotiations can start.

This How-to Guide is divided into the following parts.

Taking each of these sections in turn:

1. Qualifying the seriousness of buyer interest

This is an important issue, whether you’re in the fortunate position of being spoiled for choice of possible buyers, or you’re disappointed with the level of interest resulting from your promotional activity.

Senior business owner with a tablet computer preparing a short-list of prospective buyers
Qualifying prospective buyers

You’ll have formed an impression of each prospect as you’ve corresponded and spoken with them. They’re sure to have asked you questions. If you’ve sent out numbered Sale Memorandum (following receipt of a signed Non Disclosure Agreement from each prospect), this will have answered many of these questions, whilst undoubtedly raising more.

It’s likely that the more searching the questions asked, the more interested and serious the buyer is in your business. At the very least it’s a positive sign. The more prospects showing this level of interest, the merrier! If they ask to take a look around your business this may also be a good indicator, however you may want to restrict this right to shortlisted candidates.

Part of your filtering process is to ask questions of them too. This is to assess their seriousness. By probing you aim to discover their intentions. This can have the benefit of saving you time by helping you to focus on the best prospects. A few key questions are:

  • The number of other businesses they’re considering
  • Whether these businesses are in the same sector or locality, or both
  • Whether they’ve the funds to meet, or get close to your asking price

It all helps you to form an impression as you consider your shortlist.

On the other hand, you also need to be prepared for prospects dropping out of the process. This is a natural part of the filter mechanism. It only really becomes a serious worry if they all drop out, or the remaining few are wavering.

Related: Selling Your Business To a Competitor

Drawing on project management terminology for a moment, it’s important to identify "lessons learned" when dealing with all prospective buyers, particularly where you’ve established a meaningful dialogue.

Honest feedback from prospects, whether good or bad, has real value to you. Listen carefully to what they've to say and the specific words they use.

If any prospective buyer withdraws their interest in your business it’s really important to find out why. This will help you to understand any weaknesses in your selling proposition.

There are numerous reasons why a prospect might withdraw their interest. Here are a few possibilities:

  • Your asking price is too high
  • The structure of the deal is not acceptable - for example, too much cash required up front, no seller finance, your desire not to stay on in the business etc. – thereby making the deal unaffordable or too risky for them
  • More attractive alternatives are on offer (ask them to specify why they’re more attractive)
  • They don’t believe your forecasts

Be prepared to take this feedback at face value, and be honest with yourself.

Just as important, assess the implications for your next steps in the sale process, assuming you still have a number of prospects from which to choose:

  • Is there a consistent message emerging, or is the evidence conflicting?
  • What can you modify or change before you negotiate with other prospects?
  • Do you really need to change anything? (in other words was this just your screening process working effectively to get down to the real prospects)

The situation is somewhat different if there are no realistic buyers left. Your options then could be to:

  • Change your advertising campaign or message (or both), for example by advertising on more online sites or in specialist advertising channels more suited to your type of business (in other words your approach to date has not unearthed the right prospects)
  • Revise your Sales Memorandum in the light of feedback
  • Assess whether the asking price is too high, so you may want to revisit your forecasts in the Business Valuation Tool, which may have been too optimistic to be believable
  • Change the terms of the deal to share more of the risk with the buyer (offer seller finance, or stay on in the business for an agreed period as part of the deal, or both)
  • Postpone the sale so that you can make a few changes that’ll make the business more attractive (see the How-to Guide), removing the remaining buyer objections (as identified in the buyer feedback)

To summarize the key lesson from this section, be sure to listen carefully to the messages from prospective buyers and actively seek feedback from them, so that you can learn lessons and be more effective in subsequent buyer negotiations.

2. Using a framework(s) to compare prospects

Let’s suppose that you’ve successfully identified a pool of buyer prospects from which to choose. Competition is good for you because it increases the chances of attaining your asking price.

Your aim is a signed Letter of Intent from your chosen buyer so that the real negotiations and Due Diligence can start.

Before deciding your shortlist you may want to meet the remaining prospects (if you’ve not done so already):

  • If time permits, and there are no issues with your staff finding out, you could invite all remaining prospects to view your business - whether they agree represents a further test of buyer commitment to move forward
  • You meet with them individually off-site
  • You only invite shortlisted businesses to meet or view the business

Either way, it’s important to consider in advance how you’ll assess and make your choice between contenders. Ideally you’ll start by using the same assessment checklist from earlier in the sale process.

Now that you’ve reached this stage, here’s a refresher on some of the criteria that may help you decide. Because you need to feel comfortable with your final judgement, feel free to personalize it, or add to the list. The more solid evidence you have from the prospects (ideally in writing), the more convincing the resulting analysis will be.

Can the prospective buyer show that they?:

  • (Weight = 5) Have sufficient cash available to fund at least part of the asking price (you specify the amount)?
  • (4) Have proof that additional finance is in place to meet most, or all, of any cash shortfall?
  • (3) Have experience of running a business(es) in a similar market sector, or sufficient relevant skills that could be adapted to your business?
  • (3) Have the ability to meet your timescale for taking over the business?
  • (2) Have professional advisers (Attorney, Accountant etc.), and suitable character references identified, as an indicator that the deal is likely to go through following successful negotiations?
  • (3) Give you a good "gut feeling" as to the buyer's suitability (attitude, professionalism, etc.)

The figures in brackets show the relative weighting of the criteria (a whole number between 1 and 5) according to how you view the relative importance of each in the overall decision.

You may choose to change these weightings, or indeed remove them altogether (thereby giving equal weight to each).

Briefly list the criteria down the left hand side of a piece of paper or spreadsheet rows, adding any criteria that you feel are missing, or deleting those that you don’t believe are relevant to your situation.

Along the top of the paper or spreadsheet column add the prospective buyer names (Buyer A, B, C, etc.).

Then score each buyer against each of the criteria, again using scores of 1-5. A spreadsheet is the best way to calculate the scores using the weightings, but a calculator will do as well.

So let’s say you score Buyer A as: cash = 3, external finance = 4, experience = 5, timescale = 4, advisers = 3 and "gut feel" = 4.

This gives a total score of 76 out of a possible maximum of (by coincidence) 100 . This figure is calculated by multiplying your Buyer scores given for each criteria by the weightings for each criteria, that is: 3 (score) x 5 (weighting) + 4x4 + 5x3 + 4x3 + 3x2 + 4x3 = 76.

Calculate the scores for each potential buyer and make your short list from the top ranking scores. This method has the advantage of adding some science to your decision making. It works here for the short listing process, but your work here can also be updated before making your final decision.

An alternative, simpler method is to just list the prospective buyers on one side of the page and note down the "Pro’s" (Advantages) and the "Con’s" (Disadvantages) next to each candidate.

This helps to externalize your internal thoughts and feelings for each. Giving you written evidence to assess before making your decision.

By way of summary, this section stresses how helpful it is to use a structure to guide for your thought process when there’s an important decision to be made.

3. Securing commitment to next stage negotiations

There comes a point when you must make a choice of buyer. When doing this, it makes sense to carry forward and update the information and analysis used in Section 2.

At any stage you may use members of your selling team to provide guidance and observations. Their help may be particularly valuable here. However in the end it’s the decision of the owner (or owners) that counts.

A signed Letter of Intent is the crucial document here.

This is because from now on significant amounts of resources and time will be focused on the fine detail necessary to conclude a sale with this buyer. It’s sure to involve you, but perhaps also other members of your team.

Without a signed commitment from the buyer it wouldn’t make commercial sense for you to proceed.

Equally, from the buyer’s perspective they'll want to know that the effort and cost of detailed Due Diligence will secure the purchase of your business. This assumes a successful conclusion to negotiations and the absence of any unforeseen hitches arising from Due Diligence.

This section confirms the central role of signed documentation in protecting both parties in a negotiation. The Letter of Intent and Non Disclosure Agreement (required earlier in the selling process before issuing your Sales Memorandum to prospective buyers) are both very important in this respect.

More on the topic: Qualify the Small Business Buyer

Published by ExitAdviser |

Content ID: 1100