Ensuring your business buyer can and will pay you
Transferring your business to another owner is simple if you don’t care who buys it or what they will do after the sale. However, with seller financing not only being a common part of a business sale package, and the way to optimize your financial return on your business investment, you will care who your buyer is and will care about their financial stability. You didn’t spend years of your time building a business only to turn it over to someone who cannot, or will not, pay a proper price for it.
Cash purchases of a business are rare, and usually are not as lucrative as sale structures that include some portion of the sales price being seller financed. Because of that, careful vetting of prospective buyers in important, not only for a skills and experience fit, but for financial and creditworthiness. A skilled business broker will help you do this, but here are some considerations to look for in the process.
When you you are qualifying a buyer for your small business, you and your business broker will be asking for resumes, references, and credit history. When selling your mid-size business you will ask for Resumes and References. Knowing how to evaluate this information requires an understanding of what type of buyer you would be willing to lend money to within this context.
What to look for in a buyer resume
In qualifying the buyer, you should have a resume in front of you to consult. This resume should include the work and experience that relates directly to the business that you own. Don’t think too literally here. As I have blogged about previously, when I sold my janitorial business, the buyer didn’t have janitorial experience, but had extensive and relatable sales experience that, reading between the lines and conversations with him about his experience, I could clearly see how his experience would apply directly to my company.
While considering the buyer, it is equally important for you to examine your business strengths, your weaknesses, and the role you play. Once you leave the company, the business must be strong in operation (even without you) because of the systems, processes, and employees that you have in place.
Obviously, the buyer doesn’t need to be strong in this area; the employees you entrust with your company should do their jobs and do them well, regardless of who signs their paychecks. The buyer should be strong in the areas that you fulfill, the business needs to be able to grow and be more successful. In fact, what you are looking for in the buyer is not merely someone who can continue doing what you did, but someone that can take your business to the next level.
Successful growth of the company after you sell it is important to you, especially when the sale is partially seller financed. Forget what the business is currently doing; if the buyer is the right match, then two years from now, the company will be much larger and have much greater capacity to pay you the money you are owed and the interest that is mounting.
What to look for in references
No matter if you have a small business or looking to sell a midsize business ask for references. Yes, most likely anyone that the business buyer gives you to call will give a good reference. Therefore, a good reference isn’t the goal. Ask about the perspective business buyers experiences, accomplishments etc. This line of questioning is even important when selling to a Private Equity Group. How often would checking up on a private equity group reveal bad business dealings. Of course, a good business broker or M&A firm should vet these guys out for you. It isn’t uncommon for our firm to ask for references of past businesses that they bought and to speak to everyone involved to see how the transaction happened to how the business is one, two, three, five years later.
What to look for in credit history
A thorough review of credit history when selling a small business is another important part of buyer vetting. As a business transition specialist, I must say that I rarely see a prospective buyer with bad credit in terms of credit score, so what I really want you to focus on is beyond the credit score. Take a look at credit history, and in particular look for what type of credit they have had previously and, if any, what type of problems you can see in their credit history.
You are not alone in this evaluation process; that is why you have a business broker at your side helping you see the things you need to see. A good business broker will sit down with you as a “Credit Committee” to analyze the creditworthiness of an individual to buy your business.
Here is an example of the type of credit detail to consider. Once I was evaluating a prospective buyer with an enviable credit score of 700, but there was something in the credit history that was a red flag for me, a repossession of a car. Now, as a business broker where the seller has put his trust in me to sell his business to the right buyer, this was concerning to me. I wanted a complete explanation of what happened and how the issue was handled. If the buyer was the type of person that would allow their vehicle to be repossessed, would they also be the type of buyer who would walk away from your business when the times get tough? The seller and I would not know without getting more information. In this particular situation, the buyer had a lemon car and was able to show the documentation of this and, upon request, a letter from the lender where they were correcting the issue on their credit report (even though it had not been done at the time we were reviewing). In the end, the buyer ended up being more than qualified to purchase the company and paid the seller note in full, giving the story a happy ending.
Without a quality business brokerage firm in place checking on these things, the seller might have missed the repossession in the first place or seen it, misunderstood it, and passed on a great prospective buyer out of a kneejerk reaction. Neither course is advisable.
When you are selling your business, and investing in its future through a sellers note, you have more opportunity to evaluate the pros and cons than with any other business investment you will ever make. Take advantage of that and don’t sign on the dotted line until you have done sufficient homework on the buyer.