How to Check the Background of a Potential Buyer

Selling a business doesn’t just happen and hardly rushed. However, the perfect buyer might come along and offer one of the most tempting deals possible any seller wouldn’t let go just like that. You might find yourself ignoring proper legal and financial background checks and expected due diligence, including the little matter of investigating a prospective acquirer.

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Unbeknownst to many new business owners, not every buyer with a handsome proposition and golden words is precisely what they claim to be. It’s possible a potential company purchaser has serious and damaging ethical, financial, legal and other secrets you might not know about. The prospective new owner might have series of detrimental bankruptcies or may have been the focus of financially-related investigations or prosecutions.

Even worse, going ahead with a deal without doing proper checks on the potential buyers’ background could deny you the opportunity to ascertain whether the entity interested in your company is just a mere façade crafted to swindle you as much as possible. All these are severe possibilities you shouldn’t go through considering the opportunity to perform background checks of every entity interested in purchasing the enterprise.

Different faces of background checks

Most people actually think that the only people whose background is really investigated are employees. As such, prospective employees usually go through exhaustive checks, ranging from intense processes such as reference interviews, verification of academic documents, criminal records, verifying claims of past employment and experience among others. Even so, when it comes to company acquisition and purchase the process is way penetrative, rigorous and comprehensive.

Company and related entities such as their board members, managers, owners, specific members of staff and officers among others who are intensely involved in the purchasing firm and its confidential transactions. It’s actually the expectation of every individual, including those involved in an acquisition that a deep check of their background would be carried out. The goal of such a serious check is ensuring that the acquirer is exactly who they claim to be, prevent dishonesty and fraud and shielding a business owner from undeserved, avoidable liability.

Is the prospective acquirer ready to be the new owner of your business?

Way before you begin a background check on a potential buyer know without a shadow of a doubt they’re serious from the beginning. A number of pointers can tell you whether the potential taker is genuine and not a fraud.

Occupational type and size they’re after: Every seller expects a buyer to be serious and know exactly the kind of company they want to acquire, when and why, including the kind of size. It could be a significant selling price, lots of employees, gigantic profits or just a large turnover. Likely business buyers who seem to be searching for any type of company to invest in even when your firm doesn’t fall within their industry can be a clear sign and loud warning the entities might not be serious, hiding something or should be entertained warily.

When they want it: No one really declares or shows interest on something and then lacks a sense of urgency. There’s a high chance the entity might rush to request for details about your business and then keep you waiting. They might appear to lack the earnestness you’d expect in an interested buyer. Right from the beginning have your own expectations and demand to know when to expect their reply or feedback to avoid wallowing in perpetual anticipation.

Not perpetual "wanters": If you aren’t careful you could fall into the trap of professional and perpetual folks always interested but never getting the deal done. Huge time wasters, such persons may harbor the thoughts of entrepreneurship but hardly pull it through. From the beginning they may talk big and appear like the perfect prospective owner any business seller might have in mind with the right mentality and saying the right things, which may be all they have.

Past can be telling: Businesses are different and the acquiring individuals might be trying to break into an industry they’ve no clue about, especially on the needs of experienced employees and specific qualifications and expertise. It pays as the owner to be real and clear from the beginning on the experience, expertise and skills required to effectively run the establishment.

Otherwise, the potential owner might take you through the steps and motions and just before concluding the deal realize they lack the requisite skills and depth to take the company to a higher level. Since you understand the expertise or rigors that come with running your business, during the negotiations offer stirring add-ons such as extra training for any new employee or bring in expertise into the business before you even enter into discussions.

You could offer employees with the relevant skills, but may want to leave after the acquisition, some decent inducements to remain around for a while longer.

Monetarily able: It all comes down to whether the expected owner is actually able to buy the business. Right from the start, this should be clearly indicated. Otherwise, you could be taken through the arduousness of company purchase only to be disappointed by the acquirers’ inability to afford the cost. This is why a background check is so important before you even entertain anyone’s intention and desire to get your firm. Request to be shown and convinced that they’re interested, able to finance the purchase or can access funding if need be.

Any sincere business acquirer will be more than willing to show their financial ability to purchase the company or clear, verifiable access to funds. You can in fact request the entity to provide a letter from their bank or other financier or their resident accountant clearly indicating they’ve the funds to complete the acquisition.

If they’re unwilling to forward a document demonstrating their financial ability to complete the takeover or lack the funds to do so you would have saved yourself a lot of regret and disappointment in the future.

Related: Business Sale Documents

Checks don’t need to be secret

Prior to a check of the background of a potential business procurer you could request their express permission in writing to do so. You could do this by requesting the most recent individual profile, curriculum vitae or resume of the would-be owner while promising to do the same for them if they need to verify anything about you, the business or employees.

Some checks aren’t complicated and can be done fast, whether legal or personal. Armed with a CV or resume, for instance, you can call or email contacts and referees as well as former employers or partners in business to ascertain accuracy of details such as experience, positions held, job titles, locations or key dates. While human resource professionals might hide details of past members of staff, individuals such as former team members, supervisors, team leaders, colleagues etc. are usually more than willing to divulge anything about them depending on how you approach them.

It’s also easy to complete a background check fast through informal channels such as social media tools like Facebook, LinkedIn, Twitter, among others, including searching the company or individual on search engines such as Google, Bing and Yahoo. Research databases are immense and available in any jurisdiction and can also be used to search more information about an entity for a fee.

Potential fraud

You might really want to know about the possibility of a past security deceit, illegal business practice or suspicious financial activity. Depending on your state or country of residence, there’s always a securities exchange body of the government that can be searched or approached for the information.

In the process, you could uncover lots of significant details the impending business acquirer may have omitted or left out including commercial affiliations you may have a problem with, such as close ties with a competitor raising concern whether it’s a competitor simply seeking to destroy your business to kill competition or other underhand motives.

Non-governmental and Governmental bodies

Investigating the litigation history and situation of a prospective company buyer can be done through state records, such as State Local Government in the United States. Some takers might be involved in legal cases at the federal or national level and checking whether this is the case is important. In the United States for instance, you can use the Case or Party Index website to peruse civil litigation lists, bankruptcy and criminal legal cases taking place in all the different federal level courts. You might have to pay a little fee for accessing the documents and their reviews.

Litigation documents and related data at the state level can also be checked, such as through the Legal Dockets website in the United States. Counties also have their court records available to the public and a company can be checked easily, including some of its heads and whether they’ve ever been involved in unbecoming legal processes. Federal and national records are better searched by lawyers to ascertain if a prospective business owner has ever been tangled in federal or national lawsuits of any kind.

Another body many business owners forget is the BBB (Better Business Bureau), which offers different company ranks (A-F), including lots of other services critical in checks of buyer backgrounds like dispute resolution information, prevention of fraud, promotional genuineness, business ethics, among others in relation to establishments and customers.

As you might already know, businesses across the world have their trade practices controlled and regulated by the government, such as the US FTC (Federal Trade Commission). State bodies and agencies regulate different businesses in relation to the commodities they deal with while associations such as legal associations, national or state ones, regulate law firms.

Once you’ve ascertained the industry where the individual or business entity interested in your company falls in, approach any government and non-governmental monitoring body for more information on them. Even better, small businesses such as gyms and salons are also regulated locally by diverse departments, meaning you can even get licensing information of a salon worker or gym technician.

Credit histories

Whether of a prospective future business owner or the entity involved in a purchase, checking their background could begin with their credit worthiness and history. You can actually get material report of the individual, which also comes with lots of particulars relating to their legal past and credit background.

Background checks outsourcing

At times, you might not know where to start with the screening of the background of a prospective business owner and any of their management team members or employees. Outsourcing the job to any of the hundreds of firms offering the service can save you a lot of time and money while getting you comprehensive and efficient information than you could on your own.

Even better, outsourcing checks gives one the ability to determine whether an intensive search and screening that dozen leave anything to chance is the way to go, including verifying the identity of the individual, their company or employees as well as their social security information, credit reports, criminal past, driving records and much more.

Due diligence checks

Carrying a contextual check of a buyer or purchasing company and future owner of the business cannot be artless and sloppy. It must be effective, thoroughgoing and exhaustive. Even so, it doesn’t require a lot of information to begin. If the potential taker is a company just the name, address and names of the management and their identifying details are needed. In any due diligence checks some expectations are expected and in effect offer red flags about a company or individual.

Fundamentally, the procedure seeks to know whether:

  • An entity has the experience, financial muscle and credentials it swears to have
  • The organization or firm acquiring your business has any history of fraud or corruption
  • The entity is a real company or corporation and has a verifiable permanent business and not after duplicitous contracts
  • The company or its owners have been taken through litigations, diverse investigations, suspensions, negative publicity, prohibition and financial related enquiries, among others
  • The entity is able to take over the business and keep it going efficiently (has demonstrable resources, workers and experience)

When it comes to an individual who wants to purchase your business the check on his or her background is almost the same as that of a company or organization and seeks to settle certain expectations, such as:

  • Whether the business the individual is involved in is legitimate and the person genuinely has the experience, knowhow and credentials claimed
  • If the individual has any history of fraud, theft or dishonesty
  • Whether the individual is facing litigation and legal realities that could affect the performance and standing of the business
  • If the person has a past permeated by adverse publicity, disentitlement, financial problems, legal suits, criminal investigation or suspensions
  • Whether the employees, officers or prospective owner has been involved in any business misdemeanor, corrupt activities or fraud
  • Any legal process against or by the prospective business owner that could affect company negatively

These are just in-exhaustive things expected in any background check not just of the potential owner but corporate entity involved in the acquisition.

Most importantly though screening a potential future owner of your firm cannot be done slackly or hurriedly. You should never continue with the negotiations or entertain any deal before you know what kind of persons or group of individuals you’re dealing with. Fraud and troubling contracts are real and avoiding them can save you from losing your company and hard earned investment like so many business holders in the world today.

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Published by ExitAdviser


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