Guide To Selling a Business

Separating serious buyers from tire kickers, well-intentioned prospects without adequate financial resources, and spies is a difficult proposition. Much comes down to personal judgment. The following guidelines should be helpful:

Ask, "Do You Have The Money?"

There are a lot of shoppers for businesses out there who are not realistic about what they can afford or about the realities of obtaining financing. Don't be afraid to ask a prospect how he or she intends to finance the deal. If he or she is highly uncomfortable with this question, it's a bad sign. Other danger signs include:

• Not understanding that banks usually expect collateral (real estate in most cases)
• An unwillingness to use one's home as collateral, even if there is no other collateral available
• Misconceptions about small business loans being easy to obtain
• Vague plans to find a backer or investor
• Bad credit history
• Unsubstantiated assurances that money is no problem.

In most instances the bottom line is that a bank will lend money to someone with solid collateral to support the loan. Some banks imply differently, but collateral is almost always required. With a few exceptions, the US Small Business Administration generally requires collateral in its lending and loan guarantee programs. To pass this initial screening a prospect should have cash or solid collateral that he or she is willing to pledge or access to money from family or other non-bank sources.

You can pre-qualify your business for a small business administration loan, before you even begin to sell it. There are a number of consultants that can help you put together a loan application package.

A buyer without cash or collateral that he or she is willing to pledge is not a good risk, unless you are prepared to finance much of the deal.

Rating Prospects

Categorizing people based on personal observation is a dangerous game. But after years of screening serious buyers from prospects who will not buy businesses, I will offer my own subjective rating system by category.

Businesses and Business Owners

Those who own at least one business are the best prospects. These individuals are more realistic about what is involved in buying and running a business, obtaining financing, and making a deal.

Not only are existing businesses and their owners more likely buyers, but they are also more likely to know what they are looking for. Further, they are used to making business decisions; they won't drag out the process.

Further, some businesses have more value to existing businesses than they do to individuals. A business can sometimes take advantage of synergies and economies of scale through acquiring a similar business. This is discussed in more detail in sections II and V.

Individuals With Previous Business Ownership Experience

Once someone has been in business for himself, it becomes difficult to work for a boss. It is not unusual for an entrepreneur to sell a business or otherwise leave the world of business ownership to take a job. It is far less common for that entrepreneur to happily remain in that job for an extended period of time.

If a prospect explains that he used to own a business but now works for someone else, take that prospect seriously. He probably genuinely wants to get into business again. He understands what small business ownership is about, and he probably has a working knowledge of business financing and deal making.

Individuals Whose Parents Are Or Were In Business

According to statistical studies, children from households where one or both parents were self-employed are more likely to go into their own businesses. Statistics aside, this makes sense. Children get their concepts of the world largely from their parents. If dinnertime conversation centers on the boss, promotions, and company personnel policies, children learn that view of the work world. If dinnertime conversation centers on entrepreneurial opportunities, and other aspects of small business, a very different view of career is being imparted to the children.

Children, of course, seek parental approval on a very deep level. Parents who own small businesses tend to offer approval for entrepreneurial thinking. It is not unusual for entrepreneurial parents to subtly or directly try to persuade their children to go into their own businesses. Also, parents who own businesses and approve of their children doing the same may provide financial support for a business purchase.

On the other hand, parents who feel that working for a large organization is a more desirable career option impart that message to their children and are more approving of efforts in that direction. Parents of this persuasion are not likely to offer emotional or financial support to entrepreneurial ventures.

A prospect who grew up in a family that owns or owned a small business is probably a good prospect.

Individuals Whose Career To Date Has Been As A Big Company Employee

As a general rule, individuals of this profile are not the best prospects. Whether they are lower level employees, or mid level managers, those who have always worked for someone else are less likely prospects than those who have hands-on experience running their own businesses. They tend to have misconceptions about the realities and difficulties involved in small business. They also tend to be risk averse. Even a very stable small business will look risky to someone who has never had to give a second thought about whether Friday's paycheck will be there.

However, employees of small companies are reasonable risks. These individuals have a different kind of work experience; one that has exposed them to the ways of small business. Also, the personalities of those who work for small firms tend to be less risk averse and less security motivated, which makes them more suitable for entrepreneurship than their corporate counterparts.

Individuals Looking For A No Risk Deal

As a small business owner you have a better understanding of business risk than do most other people. The fact is that there are precious few no risk situations in small business. A prospect looking for a level of risk that seems impractically low is not a good prospect. He or she will find a reason to back out of the deal, probably after wasting a lot of your time.

Mid-level corporate managers often fall into this group. Many of them labor under the misconception that they can eliminate risk through diligent attention to detail and through careful analysis. Such individuals will come close but more often than not will back away from a deal. A good way to smoke out serious middle manager prospects from the not so serious is to discuss the fact that banks will expect them to offer their houses as collateral on a business loan. Those who seem ready and willing to do this are worth taking seriously.

Another group of prospects looking for no risk deals are those who have always worked for non-profit organizations such as the government, universities, schools, etc. There are no doubt people in these organizations that do buy businesses. However, there are more in this group who are scared off by the risk and the buck stops here realities of being on one's own.

Investor Groups and Venture Capitalists

There are groups of investors who are active in buying businesses. Typically, individuals will pool money and put one or a few people in charge of making an investment on behalf of the group. They usually seek larger profitable firms but sometimes will seek a firm that offers synergies with another firm. Groups are discussed in section VII.

The best screening to do in the case of an investor or venture group is to make sure they are what they say they are. Ask what investments they have made recently, who is in the group, the name and address of the attorney who represents them, and why they are interested in your firm. A verification call to the attorney can go a long way toward verifying their legitimacy. Your biggest concern should be that you are talking to an imposter. If you are talking to a legitimate group, you are talking to a good prospect.

A word of caution, we have recently seen unfunded groups working with attorneys that will vouch for them and firms that produce letters saying things like "we are very confident that we can raise capital for XYZ Investments." The letters are meaningless. A good PEG will be able to tell you "We have 2 funds, the first with $135 million under management and the second with $220 million. The portfolio companies for each fund can be found on our website."

Some of the "Private Equity Groups" out there are even criminal. One scam involves a "Private Equity Group" that comes in, buys a company for almost nothing down, financing the rest of it on a note payable to the seller in six months time. They can come up with a reason why they'll have that money in six months but don't have it today. They will offer to pay a nice rate of interest on the note. They pledge the business as collateral so you are sure that the note will be paid.

After closing, they empty the bank accounts, collect the accounts receivable, sell the equipment, max out any company loans or lines of credit, stop paying the employees and then disappear. You get your business back, but it is now stripped of assets and deeply in debt.

The Just Had a Fight With My Boss Group

An individual, unhappy with his job or his boss, who sees business ownership, as the ticket to freedom and bliss is not a good prospect. You may hear from prospects who tell you about how their boss is a jerk, or the new management is wrecking the company, so they want to go off on their own. Don't waste a lot of time with these prospects. They don't understand small business. What they really want is a new job or to fix the old one.

As a general rule, someone looking to you for sympathy because he is discontent with his job, or looking to you for congratulations because he plans to leave is probably not going to buy your business. You are merely being used as a simplistic answer to their temporary problems. When the problem goes away, so will any thought of buying a business.

The Financial Analysts

Any serious and even moderately sophisticated buyer will be very interested in your firm's financial statements. However, some prospects look to the financials to deliver more answers than they are capable of delivering. In buying a business, a buyer should be more interested in the future than the past. The past, of course, provides a basis for projecting the future. Those who analyze the financials to death (as if by doing it long enough, their computer will finally flash lights and ring bells and pronounce the needed answers) are probably not going to buy your business. The computer will never give them the perfect information and answers that they are looking for-- those answers come from the gut.

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