What Business Sellers Look for in a Business Buyer
This article provides potential business Buyers with valuable insights about being prepared to successfully deal with business sellers and their brokers in today’s competitive economic climate.
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 “some” financing to qualified buyers
• The business is financeable: we’ve presented purchase scenarios to various lenders and have obtained lenders’ interest in the transaction
• 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 amongst 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 some equity infusion by the Buyer: We have encountered 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. (There are some exceptions for the purchase of certain types of medical and other professional practices.) Or, if the seller of a business knows that the business is extremely risky, or is being compelled to sell (illness, etc.), then one hundred percent “Seller financing” does occur occasionally. But if a selling business is profitable and has adequate cash flow, Buyers should not put stock in total seller financing.
2. Reliance on friends, relatives and “high wealth” partners. Many would be Buyers think that they have friends, relatives, neighbors and other high wealth individuals who will ante up with a required down payment. Maybe such conversations have taken place over a drink or two. But talk is cheap. Seldom has it been my experience to see these “investors” come through when it is time to write the check. My advice to those “Buyers” is to establish an escrow account and have the friends, relatives and etc. actually deposit what they are willing to invest in a business that they will eventually approve. Once equity funds are set aside or 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…smart 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 busi