A Step-By-Step Guide to Qualifying a Buyer
You know that feeling of juggling a billion tasks in your exit process while your activities list is three miles long? And then you must also qualify the buyers?
Many will tell you, “That’s a day in the life of an entrepreneur,” but it doesn't have to be this way. Whether you received an unsolicited offer or advertised your business for sale, there are easy steps to follow when qualifying a buyer.
What Does a Well-Qualified Buyer Mean?
A well-qualified buyer is an individual, business, or other kind of entity with the strategic vision, financial ability, and expertise to successfully complete the merger or acquisition of a target business or company.
Types of Buyers
Your company will attract different types of buyers, and you'll have to qualify them based on their specific attributes. Let's see how you can qualify different buyers.
Qualifying Individual Buyers
An individual buyer is an entrepreneur planning on acquiring a business directly from its owner.
One advantage of the individual buyer is bringing a personal touch to the M&A process, which is often lacking in most acquisitions.
You'll want to consider the characteristics below for individual buyer qualifications:
How long they have been searching for a business to buy: If their search has been lengthy with little to nothing to show for it, it might mean other sellers don't find them a good fit.
Background, interest, and qualifications: Be cautious if the buyer lacks basic knowledge about your industry and they don't have mentors to help them.
Qualifying Strategic Buyers
A strategic buyer buys a company in the same or related industry to explore better synergies, such as branches in new locations, expanded product lines, cost savings, and additional distribution channels.
Strategic investors are willing to pay you a premium price. They may be interested in buying your company and have already sent you an unsolicited purchase offer.
Here are quick strategic buyers qualification characteristics to consider:
Geographic specification: Does the strategic buyer prefer a company in a very specific place? If so, avoid sharing confidential information if you don't qualify.
Acquisition history: A strategic buyer with positive testimonies from past businesses they acquired is better.
Qualifying Private Equity Buyers
A private equity buyer is a financial buyer who aims to buy a business for as little as possible and then sell it at a profit.
Wanting maximum returns on investment may mean not caring much about your employees and choosing to cut costs by laying them off.
When qualifying a private equity buyer, here are characteristics to consider:
One-on-one or hands-off involvement: A hands-on private equity buyer wants a big say in the daily running of a company, while the hands-off one leaves most of the say to the management. How do you want to be managed after selling your business?
The amount of capital they commit: If your potential buyer is willing to disclose the amount of capital committed to the purchase, they are likely quite serious and easy to work with.
Factors That Determine the Buyer's Qualification
While we have seen some defining characteristics of different buyers, some factors apply across the board.
Let's look at these general factors closely:
Financial Capability
It's important that the buyer can offer and afford the maximum sale price possible in cash. If they require M&A financing, they should have appropriate funding sources.
They should also be able to cover the cost of integrating the business into their own.
Industry Expertise
Is the buyer trained in your line of work? Do they have the necessary industry skills and licenses? Are they knowledgeable about the ins and outs of your industry?
Confidentiality
Your buyer should be known to respect confidentiality agreements.
While most aspects of the sale will come to light later, the buyer should resist leaking the news or details of the sale to the employees, customers, and suppliers. You'll have the right time to reveal the sale to your employees to avoid panicking.
Strategic Fit
A strategic fit applies to buyers likely to benefit from the business purchase by complementing their services or products, expanding their customer base, and reducing operational costs.
Past M&A Track Record
Check a potential buyer's mergers and acquisition history to see their experience with business purchase processes.
Additionally, a great buyer has a history of success integrating businesses they acquire.
Cultural Fit
Even as getting the maximum sale price is important, it's also crucial that the potential buyer's corporate culture is compatible with your company's.
If the buyer shares your values, the chances of a seamless integration are high.
Business Acumen or Ability
Does your potential buyer know how to run a business? If not, they may disservice your suppliers, employees, and clients.
Evaluating potential buyers using different factors can be a chore. But it doesn't have to be when you work with M&A experts who have detailed lists of potential buyers.
You can tap into this prospective buyer list to reduce the time it takes you to qualify a buyer since the team already pre-screens them.
Questions to Ask a Buyer Lead
Questions are a part of the M&A process, and you should be able to ask the right ones to qualify potential buyers.
Here are some crucial questions to ask prospective buyers:
What is Your Experience with M&A and Post-purchase Integrations?
A buyer with past M&A and integration experience is easier to work with and executes a deal better.
Does the buyer have a well-thought-out plan to seamlessly integrate your business in a way that benefits clients, employers, and suppliers?
What Caught Your Interest in Our Company?
Ask the potential buyer if they were just interested in your book of business to see if you have alignments. Check if the buyer likes your corporate culture and shares your values.
You should also study whether the buyer can explain the unique value your business presents to them. Such information can reveal more negotiation points you can exploit to increase the sale price of your business.
What is Your Vision for the Business?
Ask the prospective buyer if your business will be part of their long-term business plan.
In some cases, buyers purchase businesses only to close them down and eradicate their competition.
What's Your Post-Purchase Integration Going to Look Like?
A merger or acquisition impacts your vendors, customers, and employees.
Ask your potential buyer if they intend to relocate or fire employees, which may go against your desire to keep the workers employed.
Will You Uphold Our Corporate Culture?
Since sudden major changes in a company's culture can be too disruptive, you'll want a buyer who offers to maintain your culture as much as possible.
Some key cultural aspects to consider upholding include dress code, business hours, paid time off, and workers having autonomy over their positions.
How to Qualify a Buyer for M&A Transactions
While there's no single best way to qualify a buyer for an M&A transaction because each buyer is unique, you can use the following steps to guide you through the process:
1. Make a Detailed Buyer Profile
You have a picture of your ideal buyer in mind, right? Write a comprehensive attribute profile of the perfect buyer.
Who are they? What are their business goals? What's their financial power? What kind of business are they looking to buy?
2. Research Thoroughly
Conduct thorough research to see who would be interested in buying your company. Ask around in your business circles or Google the information, such as who has bought similar businesses before.
Be sure to talk to the former owners and management teams of previous businesses acquired by the buyer to hear their testimony regarding how the sale and transition went.
3. Engage Your Potential Buyers
From your research, list strategic and financial buyers who might be interested in buying your company. Contact each potential buyer and let them know your business is for sale, asking them if they would like to buy it.
Ask the buyers who reply with a buying interest to sign a non-disclosure agreement (NDA) early on because they'll ask for more confidential information about the sale.
Once you provide the prospective buyers with the necessary information, let them make an offer, including documents showing they are financially capable of making a cash down payment and complete payment.
4. Interview Interested Buyers
Shortlist buyers with financial capability and interview them to learn their expertise and motivations and if they have any legal issues facing them.
5. Conduct Due Diligence on Shortlisted Buyers
If you feel a buyer is ideal and accept their offer, conduct due diligence into their operations, background, environmental and legal matters, and finances.
Since this is quite the task on your own, you can enlist the help of M&A experts to tap into their existing pool of potential pre-qualified buyers. The experts can also execute every step on your behalf.
Frequently Asked Questions (FAQs)
Here are a few questions for further consideration:
How Can I Use a Buyer’s Credit Report in the Qualification Process?
You can use a buyer's credit report to see their payment history and evaluate their creditworthiness before writing a seller note in a sale where you'll finance part of the purchase price.
What Are Red Flags to Look for When Qualifying a Buyer?
Some common buyer red flags include:
Refusing to sign an NDA
Refusing to submit documents to show their financial capability
Being overly critical of your business
Refusing to be screened or evaluated through due diligence
Threatening to reveal information about the sale
Lying on their financial documents
Lack of motivation, meaning they often need to be chased down for updates
Pressuring you to sell fast
They made you an unsolicited offer but then bailed out when you told them you needed the help of an M&A team.
How Can I Use References to Qualify a Buyer?
You can contact references to ask them about their experience working with your potential buyer throughout the M&A process.
Use their information alongside any case studies and testimonials about the buyer. Listen keenly and read between the lines to understand even the unspoken notions that may point to the buyer's goodness or badness.
How Do I Requalify a Buyer After Initial Approval?
Qualifying buyers is a continuous process, so you see them differently in the light of new information.
Once you determine that a buyer you previously engaged with is a good fit, re-invite them for further deliberations and ask them for extra information to continue the qualification process.
Conclusion
Qualifying a buyer will be a smooth process if you follow the steps, remembering that each buyer is unique and gauging each against the factors that tell apart great and terrible buyers.
To make the process easier, work with M&A experts who can conduct the qualifications on your behalf to find you the best buyer.
Author(s): Brian Dukes, Managing Partner
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