Whether your buyer is one person, a few or a team of investors, do your due diligence to make sure the deal you’re entering into is solid. Buyers will have expectations and demands as they consider investing. You, as the seller, should have your own demands.
Watch for red flags in a buyer and, if you see one, step back, get to the bottom of it and don’t be afraid to pass.
Can your buyer afford your business?
A serious buyer needs to bring appropriate financial strength to the deal. Asking you to finance the whole sale is a huge red flag and you can end up running the business even after you’ve technically transitioned.
Expect to finance a portion of the sale, but keep it reasonable. Any buyer asking for more doesn’t have the financial credibility to buy your company so refuse to finance anything more than 50%.
Do they have the appropriate assets?
Know where your buyer’s money is coming from. If they’ve tapped out every dime they have to buy your business, they have nowhere to turn if something goes wrong. As the owner and seller, you do have the right to dig into this kind of information.
For an individual buyer, you can ask for deep and detailed records—asset records, bank statements, etc. It’s a lot like buying a house. When you make an offer on a place, your 401(k), tax records, paychecks, income—every financial record you have becomes a factor in whether the seller is going to take you on as a buyer. It’s the same with your business: vet your buyer.
With a strategic buyer, or anybody putting together an investment team to purchase your business, don’t expect the same level of detail you would from an individual. However, you still need to vet your buyers. You should know who each investor is as well as their financial strength and situation so that you’re aware of any and all risk before you sell.
Look for qualified investors
Qualified investors are people who have already been vetted and have the assets to be part of the transition without betting the farm. A qualified investor can afford to lose their investment without being thrown into financial ruin.
Ultimately, you don’t want to be so desperate to sell your business that you take on too much risk. If you’re running a good company, there will be more demand for it and you can send away any risky offers without worrying whether you’ll find another buyer. If you’re not running a good company, get some advisors, make a plan and build your organization up into a good, in-demand company that will draw qualified buyers.
Bottom line: Know the financial status of your buyer(s) before you sell.
Speak with an expert about transitioning your business.