Buyers
Buyer Marketing
Once a sales price has been established it is essential for the business owner to begin to market and secure buyers. The marketing method they employ can be with the use of a professional or by employing ads via print or internet on their own. The utilization of print and internet should come with an expectation that the owner attract only the kind of buyer that will be visiting that channel for a unique business opportunity like theirs. For example an owner might not want to advertise in a glamour magazine if they are selling a waste disposal company, and more seriously, owners don’t want to advertise where their ad dollars are going to be wasted or ad costs are too high to justify running continuous and effective advertisements. The owner must at all times get the best bang for their buck when they advertise. It also can be counter productive to spend so much time prospecting for buyers that it impacts the effective running of the business.
Buyer Pre-Qualification
Before a owner attempts to begin active negotiating with buyers that are produced from marketing, the owner must pre-qualify the buyers. First to protect the owners interest by making the buyer sign a NDA (Non Disclosure Agreement) or CA (Confidentiality Agreement) then second the owner must verify proof of funds to establish the buyer is legitimate not only in desire to buy, but in the ability to complete the sale.
The NDA (Non Disclosure Agreement) and CA (Confidentiality Agreements) are documents that require the buyer to legally be bound to not disclose the intimate details of the business that will be imparted during the review. The NDA/CA are a must for any owner that will be showing their business to multiple buyers. One sure sign that a buyer is either a novice or less than trustworthy is their refusal to sign an NDA/CA. If a buyer refuses to sign an NDA/CA an owner would be wise to not reveal any intimate details of the business. The unscrupulous buyer is just as prevalent as an honest one so every owner should be wary and prepared to error on the side of caution.
As for proof of funds an owner who is successful in marketing the sale of their business will receive many inquires from interested buyers. As discussed previously an NDA/CA is essential to indemnify the owner in the event that a buyer might take advantage of the knowledge they are imparted. The other more delicate circumstance that must be defended against is the viability of the buyer. It would suffice to say that even when a buyer is willing to sign a non disclosure and is willing to actively and thoroughly pursue the purchase of the business it all could be for naught if the buyer can not financially complete the sale.
Many times a buyer will negotiate vigorously to purchase the business even though they know full well that they do not possess the necessary funds to complete the sale at the asking price. The motivation of such a buyer has many self substantiations, for example, a buyers goal might be to have extensive and lengthy negotiations so they can buy time then at the end persuade a exhausted owner to allow the purchase with minimal down, if not drastically reduce the price given the relationship that is formed during negotiations, but most prevalently these under-funded buyers are simply “jerks” and enjoy wasting an owners time. The best way to avoid such a scenario with a buyer would be to establish a time period for requesting to see a buyer’s financials, some owners like to ask for the buyer’s financials at the same time the buyer is asking for theirs. Given that this request for proof of funds goes smoothly and the buyer complies the owner would be best served by requesting at least one of theses documents to prove the buyers viability.
A letter from the buyer’s accountant signed on the accountant’s letterhead stating the buyer has sufficient liquid assets to complete the sale for the full asking price.
A letter from the buyer’s banker signed on bank letterhead stating the buyer has sufficient funds deposited in the bank to complete the sale for the full asking price.
A bank statement from the buyer’s bank showing a minimum balance of fifty percent of the full asking price of the business.
A brokerage statement from the buyer’s brokerage firm showing a minimum balance of fifty percent of the full asking price of the business.
Any one or a combination of these documents should be proof enough to move forward with a buyer, but even then there is no guarantee that a buyer will not come up short in attempting to purchase the business. Again, there are no guarantees, but proof of funds is one way to at least to try to cover that base.
Negotiation
If an owner can get by the pitfalls that marketing the business and pre-qualifying the subsequent buyers they must now deal with the negotiating process. If a marketing campaign has been fairly successful an owner will now negotiate with all levels of buyers, from passive (tire kickers) to meticulous (number crunchers) to over aggressive (sledgehammers). The tire kickers are usually novices and scattered in their approach, needing assistance in review and focus when it comes to evaluating not only the business but their motives and resources to complete the sale.
The tire kicker can be a pleasant, but costly group to deal with, it would be wise to weed them out as quickly as possible. The catch though is that an owner doesn’t want to mistake a serious buyer for a tire kicker and weed out a valuable and hard earned prospect that could be the ultimate buyer.
The meticulous buyer (number cruncher) is one of the most time consuming buyers, you must be both prepared and patient with them as they are dedicated and laborious when it comes to making a decision. The numbers cruncher is a stickler for financial detail quoting formulas and tendencies and has an expectation that the owner possess documentation for every level of expense and profit of the business. To the business owner that is themselves fully prepared to submit detailed financials it can be a bearable task to deal with the meticulous buyers, to a business owner that has more informal substantiation of the businesses financial workings it can be a arduous task to say the least. Multiply that by say three or four of these during the sales process and you can see how distracting this can be to running the business on a day to day basis.
The aggressive buyer (sledgehammer) is the buyer who will appear to want to buy fairly quickly, but not immediately at or near the price point the owner sets. The aggressive buyer will deluge the owner with questions and will haggle the entire time they are negotiating. The sledgehammer buyers are a nuisance many more times than they are a solution. The sledgehammer buyer usually is keen and savvy, but unfortunately is uncouth in their pursuit of the business and that alone might be a deal killer, even when they might actually be a good prospect.
All is not difficult in the buying process when dealing with buyers, many are well intended, qualified and fairly easy to deal with, but with the average buyer waiting about 18 months to make a purchase, the eventual buyer of the business could be hard to find and difficult to get to make a timely decision.
Owner Financing
In the event that an owner does find it necessary to make the deal with a buyer by bridging a gap between the buyer’s funds and a acceptable selling price, owner financing is an option. Owner financing is the holding of a personal note from the buyer. There are positives and negatives to holding a note.
On the downside, if the owner allows the buyer to pay off slowly over time, they retain many of the risks that come from continued ownership of the business while giving up control of its management. In most cases, the buyer's ability to make the payments will depend on the future success of the business, yet the buyer may know little about the owners company, their customers, or even their industry. The buyer can mismanage the company down to nothing very quickly, if the owner doesn’t keep an eye on them. If the buyer runs aground and stops making payments, the owner’s only real recourse may be to foreclose on the note and repossess the business, but that means they will have to find another buyer and start all over again.
On the upside, carrying back a note for some or the entire purchase price may be the only way to sell the business, since banks have fairly strict lending criteria for acquisition loans. Moreover, seller financing can provide a tax break for an owner if they qualify for installment sale treatment. For the buyer, seller financing can be a godsend because it generally has more relaxed qualification standards and more lenient terms than a bank would have.
Mechanics of seller financing. The simplest way to provide seller financing is to have the buyer make a down payment (generally, an owner should insist on a down payment that's as large as possible), with the owner carrying back a note or mortgage for the rest of the purchase price. The business itself, and/or the significant business assets, provides the primary collateral for the note. A lien on the property is filed with the secretary of state's office, so the world at large knows that it exists. If the buyer defaults on the note, the owner will be the first in line to step back in and take over the business.
Aside from its simplicity, this type of deal can be very flexible — an owner can adjust the payment schedule, interest rate, loan period, or any other terms to reflect their needs and the buyer's financial situation. For example, they can provide for a floating interest rate, or one that starts low but goes up gradually over time. Most seller financing will be for a relatively short term (say, two to five years) but will be amortized over a much longer payment schedule, so that at the end of the loan term there's still a large portion of principal remaining. The buyer will have to obtain outside financing to pay off the balance of the loan in a "balloon" payment at the end of the loan period. The idea is that at that point, the business will be on a solid footing and bank financing will be easier to find.
The buyer may have lined up a bank to do the primary financing on the deal, and may want the owner to take back subordinated debt for the remainder of the price, in a variation of a leveraged buy out (LBO). In that case, the owner is second in line if the buyer defaults on the primary loan. Obviously, this is not as desirable a position for the owner, and if they agree to it they should demand a higher interest rate. The owner should also think about continuing to maintain an equity position in the company, so that they have a voice (even if not the controlling voice) in the management of the company.
Protecting interests. If an owner agreed to finance part of the deal, they should try to get the buyer to provide more security for the loan, besides the business itself. For example, they might require the buyer to put up a personal residence as additional collateral (assuming there is significant equity in the home.) Some buyers have other commercial real estate, or investments that can provide more security. The owner can also require the buyer to personally guarantee the loan, just as a commercial lender would. This can protect the owner if, as is often the case, the buyer finds that running the business is harder than it looks and is tempted to welsh on the deal. And, of course, the owner will want to thoroughly check out the buyer's background, including credit record, management experience, personal assets, and character, just as the buyer will check the owner’s business out during the due diligence phase of negotiations.
In order to further protect themselves, an owner should require the buyer to take out a life insurance policy with themselves as beneficiary, so that the loan will be paid off if the buyer meets an untimely demise. If the buyer will be actively working in the business, the owner might also consider getting disability insurance on the buyer, although sometimes this is prohibitively expensive. The sales contract may also restrict the new owner's sale of assets, acquisitions, and expansions until the note is paid off, and may specify that the old owner get to see the quarterly financial statements so they can keep tabs on the business.
Instead of financing per se, particularly if the owner is being asked to put up secondary financing to a bank's acquisition loan, the owner might be able to have the buyer purchase an annuity contract, or purchase some zero-coupon bonds. These are sold at a deep discount off of their future value. With this approach, the buyer gets the benefit of a lower payment now, but the owner won't be so dependent on his or her future success. This plan works best in the situation where the owner suspect that they have a well-qualified buyer who could actually pay cash for the business, but simply doesn't want to tie up all his funds there.