Show Me the Money

Individuals are fickle, as anyone who pays attention to human behavior can attest.  Yet they may still be the best route to a successful exit.

Smaller transactions are more likely to be within the reach of an individual buyer, and less likely to be of interest to private equity groups or large public companies.  This would include most businesses where the adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) is less than $1 million. 

Most individuals want to actively operate the company they acquire, so these buyers will look for companies that do not require highly specific industry or technical skills (i.e., low barriers to entry), where the seller is planning to retire but willing to commit to a reasonable transition period, where cash flow supports payment of some salary almost immediately, and where the most important customer relationships are not overly dependent on the seller’s personal involvement.

Dennis Schaecher of Business Ownership Strategies in Durham, NC, has advised many individual buyers.  “If I were a seller,” he says, “I would start with the assumption that any individual buyer probably cannot both buy and run a business.  Until he or she proves otherwise, it is all too often a waste of time to start developing a personal relationship or getting your hopes up that a deal may be forthcoming.”

Here are a few good questions to ask, before sharing any confidential information:

What are the buyer’s objectives?  A serious buyer will already know the industry(ies), size and location(s) they are targeting.

Does the buyer have relevant experience?  Review a resume and discuss prior acquisitions and deal-making, business ownership, and industry and management experience.

How will they approach valuation?  Watch out for “predatory” buyers, who are only going to be satisfied if the business can be acquired at well below fair market value.  Be wary if a potential buyer seems much more interested in the terms and conditions of the deal than learning how the business really operates.

Where is the money coming from?  As Cuba Gooding, Jr. demanded of Tom Cruise in the movie Jerry Maguire, “Show me the money!”  Confirm the availability of funds and eligibility for loans.  Sellers should not be the bank of first resort.

Is the process competitive?  The best deals come from a competitive process, with multiple qualified buyers submitting competing bids.  Savvy individual buyers will try to create sole source negotiations, usually by schmoozing their way into a relationship that gets you to relax and shut down your prospecting effort too soon.  Don’t fall for it.

With a thoughtful and disciplined process for vetting individual buyers, the chances of a smooth and successful transaction improve greatly.

— David Bass

PLEASE ADD YOUR COMMENTS.  I APPRECIATE YOUR FEEDBACK.

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