The Prequalification Checklist for Every Buyer

All Potential Business Buyer Must be Qualified

Whether one is a cash buyer or seeking external financing, every prospective buyer in a business must be properly qualified. A qualified buyer involves completing and signing a Non-Disclosure Agreement (NDA) and showing one’s financial ability to buy the business. In some cases, a qualified buyer also involves having the right skill-sets 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 prior to receiving the confidential listing information about a business. Under the terms of an NDA, the buyer may not have contact with the seller’s customers, suppliers, or employees without the consent of the seller. An NDA also protects the seller-broker relationship and assures that all communication be properly channeled through the broker.  The prospective buyer must sign the NDA if they are to be taken seriously.

Financially Qualify All Buyers

The buyer must also disclose the liquid funds that they have available to purchase the business. In many instances, extrinsic evidence of ‘proof of funds’ may be required. 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 sale 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 should 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-Backed Deals

  • External financing backed by the SBA (via a bank lender) 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 – demand 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.

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 the financial capability to buy the business. This will protect the seller’s confidentiality and will help prevent wasting 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!