Potential Business Buyer Must be Qualified
Whether one is a cash buyer or seeking external financing, every prospective buyer of a business must be properly qualified. The qualification process is a multi-step endeavor and often varies to some degree depending on the business being sold. All potential buyers must complete and sign a Non-Disclosure Agreement (NDA) prior to receiving confidential information about a business. This serves to protect the seller’s confidentiality and the integrity of the deal by ensuring that the prospect channels all communication through the broker. Further, all potential buyers must show their financial ability to buy the business. In some cases, qualifying a buyer also involves ascertaining whether they have the right skill-set and experience to run the business properly.
Non-Disclosure Agreement
The NDA protects the seller’s confidentiality throughout the sales process, and must be signed and completed by every buyer at the initial qualifying stage. Under the terms of an NDA, the buyer may not have contact with the seller’s customers, landlord, suppliers, or employees without the consent of the seller. An NDA also protects the seller-broker relationship and shields the business owner from unwanted communication and questions from prospects. The prospective buyer must sign and thoroughly answer all questions in the NDA if they are to be taken seriously.
Financially Qualify All Buyers
In the NDA, all buyers must disclose the liquid funds that they have available to purchase the business. In many instances, extrinsic evidence for ‘proof of funds’ may be required. This is often the case in the sale of larger businesses. Buyers should not be given confidential listing information unless they are financially qualified. Some deals involve seller-financing or external financing through the Small Business Administration (SBA). In such instances, the buyer still must disclose their liquid funds available, especially since a buyer may still have to put down a substantial portion of the purchase price in cash at closing.
Seller-Financed Deals
A seller-financed business deal means that the seller will hold back part of the purchase price in the form of a Note owed to it by the buyer. In a seller-financed deal, the seller may also qualitatively judge whether the buyer will make good on the loan. The seller should be given the opportunity to ask questions about the buyer’s knowledge of the industry, prior work experience, and specific plans as to how they will operate the company post-closing. Depending on the buyers’ answers, it is entirely up to the seller as to whether they will give seller-financing.
Qualifying Buyers Seeking SBA Financing
- External financing backed by the SBA (via a bank lender) is also an option for many buyers.
- First, the business itself must generally qualify for SBA financing.
- The main factor to see if a business is financeable is the strength and transparency of the financials of the subject business.
- Historical tax returns which show all sales and profits of the business are of the utmost importance.
- Second, the buyer has to qualify for the SBA-backed loan.
- This involves a number of factors such as the buyer’s ability to put down a significant deposit (usually 10-20 percent) of the purchase price, the buyer’s willingness to pledge their personal assets against the loan, the buyer’s work experience in the subject industry, and the buyer’s overall financial health.
- Some industries – particularly construction related businesses or any business with special licenses – demand that the buyer have prior work experience or licenses in the specific industry of the subject business.
- It is always best for a buyer to first consult several banks and get ‘pre-qualified’ before seeking out a business to purchase.
- This will enable the buyer to realistically know which business they can purchase, and will give the seller peace of mind that the buyer is qualified.
A professional business broker must qualify every buyer prior to disclosing confidential listing information about a business for sale. Every buyer should properly complete and sign an NDA and demonstrate their financial capability to buy the business. This will protect the seller’s confidentiality and will protect the seller’s valuable time and energy during the sales process.
Give Martin at Five Star Business Brokers a call today to figure out which business you are qualified to purchase. It never hurts to ask and the advice is free!