Interviewing buyers is an important step in helping to better understand the motivation, goals and objectives of the buyer and to help screen some business options for them to consider. This process includes the discussion of many of the following important issues:
- Delving into the buyer's previous industry and career background.
- Types of businesses and industries that interest the buyer currently.
- Understanding the buyer's strengths and weaknesses.
- The buyer's personal and financial goals for buying a business.
- Their expectations for revenue, cash flow and profits.
- The buyer's timeframe and financial budget.
- Additional advisors already involved in the process.
The buyer interview is not only beneficial for the broker (so they may help the buyer achieve their goals), but it is also beneficial to the buyer so they may better understand what business would best suit them.
Some of the core issues a business broker will consider while qualifying a buyer are:
The Buyer's Financial Capacity to Execute. Is the prospective buyer serious or just curious? A Buyer Profile and financial statements providing insight into a prospective buyer's ability to execute on a purchase are essential. Often if a buyer is unwilling or reluctant to provide evidence of their financial capacity to make a purchase, it represents a red flag. A buyer who is financially capable and serious will willingly provide evidence of their financial capability.
What is the Buyer's Business DNA? The fact that a buyer is potentially interested in acquiring a business is nice, but finding out more about why they are interested and what they can bring to the table is also important to explore. Ideally a buyer will focus on a business where they have some familiarity, experience and capability to perform. This may not always be the case and can be surpassed, especially in instances of franchise purchase where training is provided to the buyer. It is also significant to point out that when banks evaluate buyers for financing they look to their background to see how well it connects to the business in question.
Managing Expectations. Determining the expectations of a buyer and managing them well is important. Pinpointing issues that can stem from expectations early can save all parties from significant wasted efforts. When looking to manage expectations, brokers look at issues like:
- What is most important to the buyer? Location? Income? Lifestyle? Growth Potential?
- What kind of ownership role and involvement would the buyer prefer?
- What are the buyer's realistic expectations for ROI and cash flows?
- How do they feel about existing management and employees?
Sellers Want and Encourage Buyer Success. Everyone wants the buyer to be successful, including the seller! There are a number of reasons the seller would like the buyer to be successful, some of these are:
- If the seller provides seller financing as part of the business purchase (often 10% - 50% of the purchase price) the seller retains "skin in the game" after the sale is completed. When SBA financing is involved, seller financing is a necessary requirement.
- When an existing lease is present on the business, if the landlord allows that lease to be assumed by the buyer, the landlord will often require the seller to remain responsible as a guarantor for the remainder of the original lease term. Thus the business seller has a vested interest in helping to ensure that the new buyer is financially successful, if only to protect themselves from financial liability. The landlord of the business, also needs to feel confident in the prospective buyer's ability to be financially successful in operating the business, or the landlord may not wish to proceed in accepting the buyer as his new lessee.
- Finally the seller has built their business over years, maybe even decades, and has established a community reputation with their customer base, vendors and employees. It would be a shame to see their business cease to continue on a successful path.
Why Does it Matter? Buying and selling a business is a significant personal and financial transaction for the buyer and the seller. It often represents a major portion of their present or future income, livelihood, lifestyle, retirement planning, succession planning and many other considerable factors. So getting a transaction "right" for both parties, is more important than just getting a transaction done.
At Transworld, we work hard to complete Good Deals with Good People. A big part of that "good" factor is ensuring a well matched fit between the buyer and the seller of the business. If you would like to learn more about how Transworld can match your business with a great buyer, please visit our website or schedule a consultation with one of our brokers today!
Roger Smolik is a Business Broker at Transworld, with substantial experience in sales, consulting, capital facilitation, operations and executive management. Previously he worked in financial securities with several international firms in California and later owned and operated a boutique investment brokerage. Transworld provides Roger with the opportunity to continue to be engaged with the essential elements of business that have always inspired and fascinated him - the ongoing cycle of business incubation, growth, maturation and economic payoff through an eventual sale, merger or expansion.