THE BUSINESS SALE CENTER

Finding Qualified Buyers For Your Business

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How to find qualified buyers
by James Laabs, The Business Sale Center and author of The Business Sale System: Insider Secrets To Selling Any Small Business

Attracting qualified buyers is a tricky proposition. The business seller walks a fine line between maintaining confidentiality and promoting to would-be buyers. Wide-open promotion of a business for sale is disastrous, but the only way to find buyers is to communicate that the business is on the market.

As in any kind of marketing, the first thing the business owner should do is define the target market – who are potential buyers for the company? Make a list of the ideal buyers – some ideas to get started:

Business buyers – Other companies may be interested in your business, including privately held companies, public corporations, large companies and small companies. What companies would be a good fit? Avoid direct competitors for now, and think about expansion opportunities and synergies that might be created if another firm bought your company. For instance, if your business is local or regional, would a similar business now operating in a different area be able to expand by buying your operation? Synergistic opportunities may include companies with similar distribution channels, technology and so on. Make a long list – don’t assume that large companies or distant firms won’t be interested – most sellers are usually very surprised at who ends up buying their business. Even consider the possibility of a foreign buyer.

Investors – The second main group are those people with money to invest in a business. Because of the huge gains in the stock market and the aging population, there are a large number of people with sufficient money to invest that are looking to be their own boss. These buyers are like diamonds – they are hard to find and you have to sift through a lot of junk to find them, but finding the right one is worth the effort.

Employees – In some situations selling to employees makes sense, but it can easily backfire. Federal tax laws allow sale via employee stock ownership plans (ESOP) that can be advantageous to everyone. These plans are expensive to set up (expect fees of at least $50,000) and have a ton of limitations (for example, the corporation formed cannot be an S-Corporation) that make them best suited for a retiring owner of a business with at least 100 employees. The biggest risk is that there will be bad feelings among employees if the deal falls through. Another possible employee buyer is a present manager (or group of managers) who would acquire the business. The drawback is that these buyers usually don’t have much capital so the owner often ends up carrying more paper than they are comfortable with. For that reason, the owner should be very confident in the ability of the new owners to operate the firm successfully.

Competitors, suppliers and customers – Employees are a risky buyer but direct competitors and suppliers are even riskier. It’s unlikely that either will pay a fair market price or even end up making the deal. The vast majority of competitors who look at your business will be window shopping or gathering competitive intelligence. They’ll talk a good game because they want to suck out as much information as possible before they walk away. Suppliers aren’t as damaging, but are highly unlikely to pay the market price. Customers – especially those in the distribution channel – are potential buyers for companies. Carefully evaluate the risk of them knowing the company is on the market prior to approaching them. As a general guideline, customers and suppliers probably aren't good buyers for your company and competitors should be considered buyers of last resort.

Don't fall into the trap of focusing all of your efforts on a single prospect, no matter how attractive they seem. There's an important rule to remember in selling a business: One buyer is the same as no buyers. If the buyer knows they are the sole interested party, the buyer can call all the shots. They can drag the process out to wear you down and generally use every trick under the sun to force the selling price lower. Only in desperate situations where a quick sale is needed should you limit yourself to one buyer. Two or more buyers keeps all buyers honest. (Note: once you accept a letter of intent, you should negotiate with only one buyer, but the other buyers will still be waiting if negotiations fail.)

Although it’s probably obvious from the comments above, we should still rank buyers in order of preference: Individual investors and business buyers are best, employees and (some types of) customers are a distant second, suppliers are next, and competitors are the last resort.

Making it known the company is for sale

There are several methods of promoting a business. At the Business Sale Center, we prefer a method we call discrete self-promotion, where the seller aggressively promotes the company, but controls to whom and how the business is promoted. After the business is prepared and ready for market, the owner can follow this plan:

- Talk up the business and network wherever possible. This is especially effective for local businesses. Attend meetings (service clubs, church, etc.) and talk up the business – improvements recently made, sales are going great, and any other positives you can bring up without sounding like boasting. Do this for a month or two, but don’t announce the company is for sale, simply talk about it in a positive light. About the third month, after people have heard your positive message, hint that you may be willing to consider selling. For instance, say, “Something interesting happened to me last week – someone approached me about selling my business. I hadn’t thought about selling before, but I might consider it if right offer came along.” National statistics show that about 50% of business sales are made to someone who had known the owner previously.

- Informally approach specific potential buyers. After you’ve made your list (this works best for businesses who are prospective buyers) call them up. Explain that, although there’s no hurry and business is swell (if this is true) you’re considering selling. Have a good reason for selling (this is extremely important and it is the first question a buyer will ask). Feel them out, but keep it casual so you can gracefully withdraw if things don’t feel right.

- It pays to advertise if you do it right. There are many places to list a business for sale, both in print and on the Internet. The secret is to run an ad that will interest people without tipping off who you are. Describe the industry in general terms, describe the location (if you think it’s necessary to attract qualified buyers), make the ad compelling and use a contact method that doesn’t reveal your location (a toll-free fax number or your accounting firm’s PO Box if they have a branch office in another town are examples). The Business Sale Center offers a service where we provide a mailing address, or phone or fax number that doesn’t reveal your location. There are two reasons to keep the ad discrete – most obvious, you want to maintain confidentiality, but also important is to avoid the image of having the business look shopworn that can happen when it is advertised over a period of a couple of months.

About the author: James Laabs is an experienced business seller and author of the book The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing) Click here to find out how to buy the book.