The world of Mergers and Acquisitions (M&A) is full of potential buyers who would love to purchase your business. This can be great news for you if you’re selling. The bigger the buyer pool, the more competitive the bids for your business, right?
While this is true, a bigger buyer pool also means a greater number of bad fits that need to be filtered out. We’ve seen buyers who raise red flags for several reasons, whether it be because they had malicious intentions, or just because they weren’t quite prepared for business ownership.
Lucky for you, we’ve spoken with thousands of potential buyers over the years and have learned how to separate the good from the bad.
To help you gain an understanding of how to identify buyers’ different red flags, we’ll break down the most common buyer red flags that we’ve encountered into three categories: financing, communication, and the buyers themselves.
Let’s get to it.
When a buyer inquires on a listing, one of the most important qualifying factors is their financing. Individual buyers (the primary focus of this blog) are usually going through the SBA’s 7a loan program in order to finance the purchase of your business. Here are a few things to look out for when learning about a buyer’s financing.
When a buyer requires additional financing to their SBA 7(a) loan, it’s common for the seller to act as a lender to help the buyer cover the rest of the purchase price. If you are a seller who is willing to help finance the purchase of your business via a seller note, then you need to pay attention to the personal finances of the buyer.
You want the buyer to have access to enough money to pay back what you loaned them should something happen that negatively affects their newly acquired business. If something were to happen, like the unexpected loss of a key customer, their SBA loan will take precedence over the seller note and get paid back first. Once the buyer pays back the SBA, it’s possible that they won’t have enough left to pay back the seller note, which is bad news for you.
In other words, if a buyer has weak personal finances, then it can be riskier to offer them seller financing.
Something else to look out for when a buyer inquires on a listing is the source of their capital. Sometimes buyers will claim that they have the capital to get a deal done, but in reality, the capital they’re referring to is only “pledged” or “committed,” which doesn’t always hold up.
If a potential buyer is trying to buy your business without firm capital, that can be a sign that they aren’t actually financially fit for the deal.
When your business gets listed, one of the most important and time-consuming parts of the deal is communication. You have a team that consists of an M&A advisor, an attorney, and an accountant who will all be communicating with the buyer, the buyer's accountant, and the buyer's attorney. This creates several lines of communication that need to remain prompt and clear to best facilitate a successful business sale.
Since this is such an important part of the deal, there are a few red flags to consider when communicating with buyers.
You’re familiar with the phrase “time is money.” Nothing could be more true when selling a business. You and your intermediary are busy, and both of you need as much time as possible to spend talking with serious buyers.
If a buyer is not communicating in a timely manner with you or your intermediary, this can lead to unnecessarily long periods of uncertainty that will likely turn into a dead-end. If a buyer receives the marketing materials for your business and doesn’t respond within a few days, it can indicate that they aren’t serious about proceeding with a deal.
Spending time waiting around for “tire-kickers” is a huge waste of you and your intermediary’s time and resources, so if a buyer isn’t communicating promptly, that’s not a good sign.
Wants to Remain Anonymous
There are a lot of sensitive materials being passed around during a business sale, so keeping your information out of the hands of competitors, bad actors, etc. is critical.
This can become a problem if a buyer wants to remain anonymous throughout the deal. When a buyer doesn’t communicate directly with the listing advisor, and instead chooses to communicate through buy-side representation, this can be a sign that they have something to hide.
Whether it’s a competitor trying to sneak around and learn about your business, or just someone trying to hide their questionable history, an anonymous buyer is a no-go.
Slow or Unwilling to Provide Requested Documents
When a buyer is slow or unwilling to provide important financial information, this is a huge red flag. If they are serious, and are capable of purchasing your business, then they are usually more than happy to quickly provide the necessary information to move the deal along.
If a buyer is hesitant to provide this information, it is likely an indicator that they are either financially incapable of buying your business, or have something else to hide. Either way, this is a red flag, and they probably aren’t a good fit.
Wants to Circumvent the Intermediary
In a business sale, it’s extremely important that your intermediary is in on every aspect of the deal. They’re the ones facilitating it, after all, and their goal is to find the best possible buyer for your business. They can’t do that if the buyer tries to communicate directly with you instead of letting the intermediary facilitate the deal.
If a buyer reaches out directly to you after signing a non-disclosure agreement (NDA), this should raise a red flag. This can be a sign that they have been filtered out as poor fits by intermediaries in the past and are trying to prevent it from happening again by getting to you directly. It can also mean that they are trying to get you to slip up and share sensitive information about the deal.
Qualified buyers should be more than willing to work with your intermediary because they have nothing to hide, and if they do have anything that they think might raise a red flag, they should be willing to bring it to the table.
Each of the red flags mentioned above are related to buyer communication or finances, but there are some remaining red flags that have to do with buyers themselves.
Won’t Sign an NDA
If a buyer refuses to sign an NDA for any reason, all talks stop there. An NDA is the only thing that keeps your information legally protected from inquirers using a business inquiry as a guise to learn sensitive information about your business. Therefore, all proceedings should stop immediately if a buyer refuses to sign one.
When entering a deal, buyers have to consider all the different ways that the business purchase will affect their lives moving forward. This is one of the biggest decisions a person can make, as it affects their location, finances, relationships, and retirement.
Since buying a business has such an impact on a buyer’s life, it’s crucial that their spouse or partner is aware of their intentions early on. This may seem like an issue that is easily resolved, but think about it. Is a buyer serious about closing if they haven’t spoken with their family about the deal? Probably not.
This can also create a problem if their spouse or partner becomes aware of the deal and isn’t on board. Suddenly, the seemingly smooth transaction can come to a screeching halt.
Family is the most important thing in many people’s lives, so their buy-in (or at the very least their awareness) is crucial when a person decides to make a life-changing decision like buying a business.
Lack of Experience
Something else to consider when vetting a buyer is determining if they have the necessary experience to successfully run the business. You want your buyer to have experience in one of two areas: business ownership, or your industry.
Some people have an aptitude for running a business, and everyone has to start somewhere. But if someone hasn’t owned a business before, it’s preferable for them to have at least worked in your industry so that they have a rough idea of how your business operates and know what questions to ask during the deal.
Unsure of What They Want
If a buyer is open to owning just about any kind of business, and can’t offer any specifics on why they want to get involved in your industry, this can be a bad sign. Good buyers come to the table with a plan, research, and a specific interest in your business.
Buyers who seem open to any and every opportunity to own a business are either too unsure of what they want to move forward, or are simply not serious about completing a transaction.
The Bottom Line
The main criteria that many of these red flags fit into is simply buyers who don’t know what they want, or who aren’t serious about a business purchase.
The allure of business ownership is exciting, which means it draws a crowd of both serious, prepared buyers, as well as inquirers who are essentially the equivalent of window shoppers. The latter may not have any bad intentions, but they do waste valuable time that could be spent finding a serious buyer.
A good M&A advisor should have a thorough vetting process to ensure that their clients only enter talks with qualified buyers.
At MidStreet, we’ve vetted hundreds of buyers, and filtered out thousands of bad fits for our clients. If you’d like to learn more about how we vet buyers for your business, contact us today!