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Three Red Flags For Business Sellers
ENLIGN DEAL TEAM | 05/05/2022
If you're planning to sell your company, you should be on the lookout for potential red flags that could derail or lessen the value of the transaction. Of course, when it comes to closing your transaction, time is of the essence. Why waste time negotiating with a buyer who is either not interested or is not qualified to purchase? Let's take a look at some of the most common buyer red flags.
1. Inadequate Buyer Experience Individual buyers should be asked if they have experience in your industry - especially if seller financing is involved. If a prospective buyer is unfamiliar with your company, they may appear enthusiastic at first but quickly lose interest as they learn more about the industry. The same is true for a potential buyer who has never bought a business before. If you're dealing with a first time buyer, you'll want to be confident that this person understands the ins and outs of buying a business before devoting too much time to their transaction. This is especially true if their Letter of Intent (LOI) contains a "no-shop" provision.
After all, purchasing a business can be a lengthy and complicated process. Inexperienced buyers may decide not to proceed once they have a better understanding of what is involved from a time and cost perspective.
Confidential Financial Information Similarly, you'll want to work with a buyer who is forthcoming about their financial situation. If you are denied access to financial statements, you will have no way of knowing whether or not this buyer is qualified to buy your company. Some buyers resist stating that their information is private.
An experienced business broker will explain that to move forward with due diligence they must be forthcoming with this information. A tactful solution is to have them get an SBA lender or loan packager to provide a pre-qualification letter (pre-qual) that explicitly states their buying power.
3. Problems with Early Communications Another common red flag is when a company expresses interest in purchasing your company but the company's actual decision makers are not involved in the communication. If a company is genuinely interested in purchasing your company, you will be in contact with a key player such as the President,
CEO, CFO and/or Chairperson.
4. Location Location Location Buyers that are not located in close proximity of the seller's business should be asked about their intentions.
VERY FEW buyers of small businesses (under $1,000,000 of enterprise value) will re-locate their families, uproot their children from schools, change churches, buy and sell a home to acquire a smaller business.
It goes without saying that foreign buyers, unless seeking an E-2 VISA, will relocate for a small business acquisition. The exceptions are Private Equity Groups which rarely make small acquisitions and executive purchasers of lower middle market businesses.
These larger businesses generally generate substantial income for their owner which justifies the disruption and costs of relocating.
Minimize Due Diligence Disruption When your company is on the market, it is critical to ensure that things remain consistent. If a legitimate buyer notices a drop in sales or the quality of your offerings, it could jeopardize a future deal. That is why you should protect your time by not wasting it on buyers who are not a good fit or who show little interest. Along the way, remember to trust your instincts. If you have a feeling something is "off" with a potential buyer, this could very well be the case. One of the many reasons business owners engage professional business brokers is so that the process can be managed by an expert which allows the owner to stay focused on the business and avoid drops in revenue or other red flags.
Working with a business broker or M&A advisor will provide you with a high level of protection against falling into a rabbit hole at a time when you should be focusing on keeping your business running as smoothly as possible. Your broker will carefully screen buyers to ensure that they are indeed viable candidates and take the burden of managing the process off the sellers plate which also maximizing confidentiality.
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