Properly Pre-Qualified Investors

Usually, a business owner’s goal is to sell their business to the right buyer for maximum value and to preserve the business’ legacy. Most often, business owners have little experience and time to devote to find and qualify prospective buyers. Thus, it is therefore advisable for the owner to rely on professional M&A advisors to identify buyers to support the owner in the transfer of the business.

Prior to identifying and qualifying buyers, the asking price for the business has to be established through an independent, 3^rd party valuation, after which the advisor will prepare the business for sale. In the first step, the advisor will create two marketing documents:

• a “blind” business profile including key information and financials and an executive summary to advertise the business in a confidential manner but to give sufficient information to buyers to decide if they want to inquire about the business;
• a Confidential Memorandum outlining the business operation including tax return based financials as well as strength, weaknesses and, most importantly for an investor, the growth potential plus a 3^rd party accredited valuation to support the asking price.

After the business owner has approved the marketing documents, the M&A advisor will create two marketing plans, consisting of a re-active and pro-active marketing approach:

• posting the business with information from the “blind” profile on major business-for-sale websites in a non-divulging fashion, never releasing the company name or location;
• extracting relevant buyers out of a proprietary database, and then creating USPS and email campaigns, segmented by industry sectors.

Once the marketing plan has been implemented, investors will respond to the advertising and request additional information. Many investors are not right for a seller and – if not identified early – will waste a lot of time and delay a sale. Ultimately, different types of investors will be responsive, to be individually prequalified:

• Strategic (Corporate) Buyers – companies from within the industry looking for synergies; these buyers can be suppliers, customers, competitors or companies which could benefit from expanding into a new market segment or using established distribution channels for their own products.
• Financial Buyers – groups such as private equity firms which make acquisitions as investments; these buyers are usually looking to improve and grow the business and sell for a profit within a few years;
• Individual Investors – looking to buy a company to run/oversee themselves, which is more common in smaller transactions

The goal is to reach a maximum of pre-qualified investors to increase leverage for the seller!

With multiple buyers contacting the M&A advisor, why then is the pre-qualification so important, to find out as early as possible if a buyer is really not interested, not in a position to purchase a business or just on a “fishing expedition”?

• Confidentiality: the more buyers know that a business is for sale, the harder it is to maintain confidentiality; by not adequately screening investors, confidentiality can be breached with negative impact on the business due to a loss of clients and employees;
• Time spent: it is essential that only buyers who have a clear interest and the ability to execute a deal receive the Confidential Memorandum; usually one third of pre-qualified investors will ask for an introduction with the business owner after reviewing the Confidential Memorandum; if buyers aren’t sufficiently screened by the advisor, the owner will be pulled into a time-consuming process instead of focusing on running the business.

How does the advisor differentiate between these buyers? Once an investor responds to an advertisement and request additional information, the advisor should send out the following pre-qualification documents to be filled out by the buyer:

• Non-Disclosure Agreement (protecting the seller’s confidential information)
• Investor Profile & Management Experience
• Financial Statement

Buyers who refuse to complete the pre-qualification documents are usually not serious buyers and there is no reason to waste time with them. Any investor who is seriously looking to buy a business should expect to be pre-qualified and should have the information readily available.

The advisor will review the information provided with focus on the following areas:

• Financial Capabilities: does the buyer have sufficient cash/assets available for the down payment and working capital? Is there sufficient collateral for bank or seller financing? Has the buyer already received pre-approval from a bank? Does the buyer have any investors supporting the acquisition and if so, did he provide sufficient documentation?
• Management/Industry Experience: Does the buyer have any experience in the industry or have they held any managerial positions in the past? Are they planning to run the business themselves or do they intend to keep the current management? These questions are especially important when bank financing is involved;
• Acquisition Experience: has the buyer made any offers or managed any acquisitions in the past and do they understand the process from pre-qualification to closing?

Only after a successful pre-qualification should the Confidential Memorandum – disclosing company name and location – and 3^rd party independent valuation be sent to the buyer. Once the buyer has reviewed the Confidential Memorandum and decided that there is sufficient interest in the business, they will ask for a buyer/seller introduction.

If the buyer seems to be a good fit, the advisor will schedule a call/meeting with the business owner to discuss the operation; if requested, the advisor will provide additional financial information and set up a site visit for the investor. Subsequently, if the buyer is ready to move forward with the acquisition, they will issue an offer to purchase or letter of intent.

If multiple offers are being made by different investors, the advisor will prepare an overview for the business owner to outline the differences between the offers and to support the business owner in the decision-making process to choose the right buyer.

In sum, the proper buyer pre-qualification is absolutely crucial in not wasting time for the seller, the M&A advisor and to avoid any compromising of the business’ confidentiality.