What Business Sellers Expect from Business Buyers
What Business Sellers Expect from Business Buyers
Many articles and books have been written about "what a business Buyer expects" from business Sellers when searching for a business. And, the business brokerage community has done much to educate business owners about preparing their businesses for sale. Well-coached and educated Sellers know what Buyers want, and what it takes to sell their businesses.
For example, in our brokerage practice, we prepare our seller clients to meet Buyer expectations. We do this by representing only seller businesses when:
The Seller has realistic expectations about the price
Cash flow substantiates the anticipated sales price
The Seller is willing to provide a reasonable amount of seller financing to qualified buyers
The sellers business is financeable
The Seller is willing to provide substantial financial and operating history to adequately pre-screened Buyers
Unfortunately, business buyers often forget one very important component of the business acquisition equation. They fail to properly prepare themselves to purchase a business. These buyers tend to put the full burden of disclosure and transparency on the Seller. This can be true among individual, corporate and yes, even some private equity buyers.
The following overview discusses some common mistakes made by novice buyers:
1. Failure to understand that purchasing a business requires a significant equity infusion by the Buyer: We often get inquiries from people who have had absolutely no cash reserves and very little equity in any collateral assets. Some believe that the purchase of a business can be one hundred percent financed. One hundred percent financing is not the norm. In fact, 100 % financing is rare even taking into consideration the market changes in the last year. If the selling business is profitable and has adequate cash flow, Buyers should not expect that theowner will provide total seller financing.
2. Reliance on friends, relatives and "high wealth" partners. We often hear from Buyers who have friends, relatives, and other high wealth individuals who say they will ante up a required down payment on a business, or even state they would like to become business partners.But talk is cheap. It has been my experience that these "investors/partners" seldom come through when it is time to write the check. My advice to those "Buyers" is before beginning the search for a business, establish an escrow account. Then havethe investors actually deposit what they are willing to invest in a business into the account. The release of funds will be subject to approval of the purchased business by all investors. Once equity funds are set aside and formally committed, Sellers will take Buyers much more seriously.
Unfortunately, there has been a proliferation of "Private Equity Firms" where the principal(s) actually have no money to invest at all. They say they have high wealth "partners" willing to fund their deals. If those "partners" haven't actually funded previous deals for this particular Private Equity Firm or if the firm can't show funds already set aside for acquisitionssmart Sellers and their advisors will show no interest.
3. Buyer's failure to know suitable price range: A significant percentage of business seekers do not have reasonable expectations about what size of business they can afford. A buyer with $100,000 cash to infuse into a transaction should generally not be inquiring about a company with $3 million or more in annual cash flows. Buyers should seek professional advice about their finances, their expectations and what they can expect to pay for a business---before making inquires about businesses for sale.
4. Failure to be "identity transparent" to the Seller: Most business Sellers strive to keep the sale of their businesses confidential. The Sellers do not want employees, customers, suppliers or competitors to know that the business is for sale. When an inquiry is made about a Seller's company, some inquirers are hesitant to be forthcoming about who is actually interested. Is the individual making the inquiry on their own behalfor, is the inquiry being made on behalf of a corporate buyer or private equity group? Buyers would do well to disclose the nature of their inquiry at the very beginning. It saves time and lays the foundation for building trust if a transaction is subsequently pursued.
5. Failure to demonstrate financial capability at the outset: Many Buyers believe that immediately sharing their financial capability with a Seller is a bad thing. They believe that doing so places them at a negotiating disadvantage. Nothing could be further from the truth! Just because a Buyer demonstrates the financial wherewithal to pay moredoesn't mean that the Buyer will have to pay more. Why? Most Sellers would much rather deal with well-healed Buyers who may offer lessbut able to get the deal closedthan dealing with Buyers who offer morebut who may not have the financial backing and credit necessary to actually fund (and close) the deal. Buyers have nothing to lose and everything to gain by demonstrating their financial muscle at the very inception of a potential deal. After all, why would a seller disclose their confidential financial information to a buyer who has not demonstrated the very real ability to purchase their business?
6. Failure to recognize the need to personally guarantee acquisition loans: Some "investors" in smaller and mid market businesses often think they can borrow money from commercial lenders without personally guaranteeing the loans. While this happens occasionally (especially if mezzanine funding is used), Buyers should be prepared to sign personally if necessary to make a deal work. Recently we sold a manufacturing company in the nine million dollar range. I advised the buyers that based upon their capital infusion and the deal structure, the lender would require personal guarantees. The Buyers rejected the notion and spent an abundant amount of time, money and energy trying to work the deal without signing personal guarantees. When it came down to closing the deal the lender advised the Buyers that personal guarantees would be necessary. After much angst and hand-wrenching, the partners succumbed and signed personally. Understanding how financing works before engaging in a deal can reduce time, money and effort on the buyer's behalf.
SUMMARY
In today's market, there are more buyers looking to buy than there are profitable businesses for sale. Accordingly, competition exists among individual, corporate and private equity acquirers for good businesses. Gone are the days where the burden was solely upon the Seller to explain why a buyer should buy the Seller's business.
In order to successfully compete with other Buyers, today's savvy business Buyer should be willing to inform and educate the business Seller about why the Buyer may be the best acquirer of the business. Here are some of the things Sellers expect from a serious Buyer:
Identity, address and background of the actual Buyer(s) (principals)
Signed Non Disclosure Agreements with Buyer(s) principals
Business and banking references with contact information
Statement about why the Buyer is interested in the Seller's business
Verifiable financial strengths and abilities of the Buyer(s) to "do the deal"
Verifiable education, business and industry backgrounds
Information about other businesses bought and or sold within recent five years
Buyers who are secretive or elusive about who they are, who their partners are, fail to discuss and verify how much equity they are looking to invest and how they plan on financing the right deal will find themselves (increasingly) ignored by Sellers.
For more information go to www.gruttercpas.com or contact the author at grutter@gruttercpas.com.
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