How to Vet a Potential Buyer for Your Business

Two business owners signing papers to sell their business

Finding the Right Person to Ensure a Smooth Succession

by Bruce Tannas

Selling your business is not like selling your home or car where you wish the buyer good luck and walk away. You’ve built this business with your time, money, and sweat. You’ve staked your reputation on the business success as well. Finally, you may have employees that will be staying on after the sale. So unlike what happens to your old home or car, you have a vested interest in what happens to your business after you sell it. You likely want the business to thrive under the new ownership and the current employees to be taken care of. That is why you need to ensure that the purchaser has the right stuff to become your successor in this business as the new owner. This article provides some tips on how to vet potential buyers of your business.

To start with you should prequalify every new inquiry before sending out too much information and for those who are more serious potential buyers you should find out even more about them before you agree to sell them your business.

Prequalifying a prospective buyer

There may be a number of buyers that want to investigate your business further. Some of them will be serious while others will be interested but don’t have the means or experience to buy and operate the business. An unqualified buyer can take up a lot of your time and resources getting information to them when they ultimately won’t be able to buy your business or won’t be a good fit for your business. That is why you shouldn’t be shy about asking some questions upfront before providing too much information to a potential buyer:

Do they have the financial means of buying this business?

Most people don’t have tens or hundreds of thousands of dollars available to them to be able to purchase a business out of savings. Most buyers will need to finance a portion of their purchase through a bank or patient lender (e.g. BDC, Community Futures, Futurpreneur, etc.) and/or through a vendor loan (from you). So what you need to ascertain is that the potential buyer(s) has enough savings and/or access to love money (money from relatives) in order to have a reasonable chance of borrowing the balance of the purchase cost. In Canada, depending on the industry, most business lenders need a minimum of 20%-30% equity from the buyer in order to lend them the balance. For example – if you are asking $250k for your business the prospective needs to have at least $50k of money (that hasn’t been borrowed) available to them to invest in the purchase. So you need to find out if they have access to enough money that they can borrow the rest. Initially, you may want to ask them if they have a minimum amount (as suggested above) in order to provide them with the summary listing document. Later on in the vetting process, when they ask for further due diligence, you may want to verify this further by asking them for proof of investment via a bank statement, investor letter, and/or letter from the bank.

What is their experience and background?

You need to think about the technical, management, and entrepreneurial skills required to successfully own and operate your business. Perhaps it might be useful to think about if you were to hire someone to replace you, the skills and experience would you want in that To start with, you may want to ask about their background and later verify it by asking for a résumé.

Why are they interested in buying your business?

Is this a dream of theirs to own a business like yours, are they competitor trying to buy (or investigate) the competition, or perhaps they are expanding and moving into a new market. Whatever the stated reason you need to be comfortable about their motivations before you provide further information.

Once you are comfortable with the answers given by the prospective buyer then you can provide more information – we suggest that you start with a summary listing document as a conversation opener. Also, don’t be afraid to turn someone down at this stage that clearly isn’t going to be able to complete a purchase or you feel isn’t the right fit.

Finding your successor

If your buyer is interested in learning more and requests more information you need to ensure that they are able to complete the sale by asking them for proof of investment (see 1 above). Once you’re satisfied with their investment proof you need to ensure that you have them sign a confidentiality agreement (if you haven’t already done so) before supplying the rest of the listing document.

Now that you have qualified that this prospective buyer(s) has the means to purchase the business your focus on vetting a prospective buyer should shift to seeing if this is the right buyer. This may go against convention in that you are also trying to convince them that this is the right business for them. The natural inclination is to sell them on your business and neglect to ascertain whether they are the right person(s) to buy it. If you need some additional questions you might ask, check out Sam Harrop’s article in Entrepreneur Magazine.

Most serious buyers will take time to complete their due diligence, so try using this time to learn more about them. At this stage, you are in effect “dating” with each of you trying to ascertain if this business and the buyer are a good fit for one another. So provide them with what they need, but also ensure you get the information you need to explore the prospective buyer’s suitability to purchase your business and become your successor. The negotiation of the sale will come later once you both are satisfied that this is the right business opportunity.

Selling a business takes time, expertise and proper marketing.

Connect4Commerce offers entrepreneurs and small business owners across the country a convenient and comprehensive place to connect, exchange goods and services, and advance their businesses. Be sure to check out further articles in our Small Business News blog for additional resources. Also, find professionals on our site that can help you with your business sale and we can help to market your business and get it sold.

Get helpful information and tips straight to your inbox

Get business tips straight to your inbox

Our team of industry experts has over 30 years of experience in business development. Get business tips and tricks for every stage of the business life cycle delivered straight to your inbox each week. You’ll also be the first to hear about new and updated listings in your searches.