Finding A Qualified Buyer to Buy A Business
Whether you’re a cash buyer or seeking external financing, you must be ‘qualified’ to buy any business. A qualified buyer means having the ability to self-fund or externally-fund the transaction, and often-times means having the right skill-sets to run the business properly.
Initial Step: Sign the Non-Disclosure Agreement
The initial step to qualifying oneself is to sign a buyer’s non-disclosure agreement. At Five Star Business Brokers of South Florida, we initially qualify every buyer by having them complete and return the non-disclosure statement. This tells us as the broker and tells the seller that the prospective buyer is serious about buying the business. The prospective buyer must first agree to to honor the seller’s confidentiality, and to respect the broker-seller relationship, if they are to be taken seriously.
Disclosing Available Funds Is Crucial To Qualification Process
The buyer must also disclose the liquid funds that they have available to purchase the business. Some sellers will not give seller-financing, and external financing through an SBA (Small Business Administration) loan may be impossible. And even if seller or external financing were available, the seller still has a right to know the internal funding capacity of a buyer. Moreover, both seller financing and external financing require the buyer to put down a substantial portion of the purchase price in cash at closing.
Seller-Financing Business Sales
If seller-financing is available, the seller himself or herself must also qualify the buyer. After all, the buyer will be basically seeking a loan from the seller, and the seller has the right to qualitatively judge whether the buyer will make good on the loan. The seller should 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 the seller’s sole discretion as to whether they will give seller-financing.
SBA Financing for Buyers Seeking to Purchase Business
- External financing through the SBA is also an option for many buyers.
- First, the business itself has to qualify for SBA financing.
- The main factors here are the strength and transparency of the financials of the subject business.
- Good tax records and a growing 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 requiring licensing – demands that the buyer have prior work experience 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.
- 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.
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!