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How to pre-qualify potential buyers

Many responses to your ad will be from buyers who are not right for you or your clients, and you (and the unsuitable buyers) could waste lots of time talking to too many, thereby delaying the sale and appearing uncommitted to serious contenders. The process of selecting the right buyers to talk to is called pre-qualification. A broker will normally do this for you if you are using a broker, but we offer some guidance below if you are selling the practice without a broker. Arguably you ought to have your pre-qualification plan ready before you advertise.

Brokers report that around 90% of initial responses to your advertisement will be from unqualified buyers who are not in a position to purchase your practice.

Why is this a problem? Don’t you want to see as many potential buyers as possible to get the best deal?

Cost of your time. Well, you are running a practice, and your time is your most precious commodity. And how much of your time will be spent dealing with them? An hour perhaps? You know your hourly billing, you can do the math! Say you have ten unqualified buyers, and spend one hour on each at $100 per hour, that’s $1,000 of your time. And worse, you will be spending less on the buyers that really matter.

Confidentiality. The more you deal with, the harder it will be to maintain confidentiality, and your sensitive business data will be seen by more people than you might feel comfortable with? So by not adequately screening unsuitable buyers out of the process, you risk divulging sensitive business information that may not only hamper the sales process but could have a detrimental effect on the future financial performance of the practice.

In many cases, these buyers will not have access to the right financial and management resources to progress and complete the transaction and are simply not in a position to buy.

So, how do you deal with the problem?

Use a broker? A practice broker will select a shortlist of the right buyers for you, so you do not have to go through the pain. Obviously, there is a price for the brokerage service, and only you, really, know what is right for your clients.

If you are not using a broker and are going down the For Sale By Business Owner (FSBO) route, then you need to take some steps, being confident you can offer a viable business proposition to the right purchaser.

Your headset.

You need to understand the importance of selecting the right shortlist of buyers, who:

•    you can trust not to waste your time
•    you can trust not to divulge confidential data
•    you would feel comfortable recommending to your clients
•    you would feel comfortable working with if there is a transition

I hope I’ve convinced you of this, by putting it in $ terms. The early pre-qualification of potential buyers is therefore critical for the successful sale of your practice.

But won’t I put off potential buyers if I rule too many out too soon? A common misconception held by many practice owners that go down the FSBO route is that they fear they will frighten prospective purchasers away by qualifying them too soon. Be confident in your business. Only a few buyers will be really serious, and you can always open up the list again.

Pre-qualification is a standard practice in the sale of any business. In fact a serious buyer will expect you to go through a pre-qualification process.

An individual or business that is seriously looking to purchase your practice will expect to be pre-qualified and a failure to undertake this task in a robust, professional yet fair and reasonable manner will set alarm bells ringing. 

Draw up your pre-qualification plan.

1. Identify the information you will or will not disclose in the advertisement

FSBO practices should NOT share any specific information about the practice (including your name or the practice name) until after all potential purchasers have been pre-qualified and confidentiality statements signed. 

Even then, information should be fed in instalments, until an element of trust has been established and the buyer identified as a serious purchaser.  Maintaining confidentiality is key to any sale.

2. Decide how to maintain confidentiality in the prequalification process

2.1 Initial enquiries

The bigger the buffer between the FSBO and the potential purchaser the better at this stage.  Consider using a trusted and reliable third party, such as your lawyer, to handle initial enquirers or to play an active part in the screening.

Otherwise, here are some considerations you might bear in mind.

Email. Needless to say do not use your corporate email address or any personal email address which can be used to identify you or your business.

So create a separate email address to handle all communication relating to the sale.  Google offer a free email service called Gmail (www.gmail.com) though similar free services can be obtained from MSN (hotmail) and Yahoo (Yahoo mail). When creating your Gmail account consider using a generic username (such as practicesaleflorida@gmail.com).

Phone. Consider establishing a separate telephone service in order to receive and respond to enquiries.   Even if your home telephone number is not listed, be sure to ensure that your answer phone doesn't give away your identity!  Consider getting a cheap pay as you go no contract mobile phone.

Postal service If you are considering using the postal service in any way at this stage to pre-qualify potential buyers consider establishing a separate postal address.

2.2 Confidentiality agreements: should you use them in pre-qualification

Confidentiality agreements are good for the seller and the buyer.

•    Brokers will often ask potential purchasers to sign a confidentiality or non-disclosure agreement very early in the pre-qualifying process, more often than not as part of their registration procedure. 


•    Sellers should not share information with potential purchasers that identifies the practice prior to a non-disclosure or confidentiality agreement being signed.
 
So, in fact, you may prefer a mutual confidentiality agreement covering both buyer and seller. Buyers also will expect their sensitive data to be respected as well.  This is a statement of your good faith.

The precise legal form might vary from State to State.  Ensure that any agreement that you have is run past your legal counsel.

What if buyers do not want to sign a confidentiality agreement? Such an agreement is the basis of a relationship of trust and open communication through the process. If someone does not wish to sign such an agreement, then you are probably better off excluding them from the process.

3 IDENTIFY PRE-QUALIFCATION INFORMATION AND ranking CRITERIA

3.1 Decide the criteria will you use to pre-qualify possible buyers, and the information you ant from buyers

Go back to your objectives for the practice sales process. What factors are important to you?

These could be:

•    Financial sales price: size and financial stability of buyer are key here
•    Earn out process: your ability to work with the buyer post-sale; in a people business, a lot depends on personality
•    Ensuring your clients are transitioned appropriately: do buyers have the right business experiecne
•    Buyer’s ability to grow the practice

And of these factors, which are the most important?

You will have to rank respondents on a number of criteria, so you can come to a judgment as to which to take further in the process.

You should set up a pre-qualification sheet, and on this you list buyer details such as income, location, sector, size, and anything else you can find out about them. You can rank these in order of importance, and then score your respondent according to these criteria. The ranking is up to you: you need to remember what it is YOU want to achieve from the practice sale process. Depending on your priorities, the rank given to each factor may differ.

-- Income ---> Gives you an idea as to size
-- Number of partners and history ---> Provides an understanding of their practice
-- Location of main and satellite offices ---> They may wish to grow in your areas
-- Main business sectors ---> Do these fit with the profile of your firm
-- Extent of services offered ---> Do these match what you currently offer your clients; do they offer more services
-- Investment capability: access to financial resources ---> Affects the feasibility of the purchase, whether te buyer may wish to defer, and, indeed, the timescale

3.2 Determine what information to give buyers at this stage

What questions are buyers likely to ask? To avoid breaching confidentiality, prepare scripted answers to the questions that you expect potential buyers to ask at this stage.  Naturally these answers should not give away the identity of your practice.

Here are some examples

-- Your practice size and income ---> Our average income over the past x years has been $y
-- Number of clients ---> We have X clients accounting for Y billings
-- Number of employees ---> We employee Y people

...and so on

3.3 Using the advertisement to get pre-qualification information from buyers

What do we mean by this?  Well to put it simply your advertisement needs to sign off with more than the words "Please contact the Seller for more information".  Consider asking potential purchasers to respond with specific answers to questions that you consider are relevant and important to the sale.

For example, you could sign off your advertisement like this:

"If you are interested in hearing more about this practice could you please provide details on your business experience, the time frame that you are currently working towards, why you are interested in acquiring this practice and how you plan to finance the deal".

Alternatively, rather than signing your advertisement off in this way, you could consider using a pre-prepared email response which you send out to all initial responders along the lines of:

"Thank you for responding to my advertisement.  Could you please provide a description of your business background, the size and type of practice that you are looking to acquire, your preferred timescales, and your investment capability."

By posing these questions you are effectively enabling unqualified buyers to 'opt themselves out' of the process.

4. Determining the right buyers: business experience and resume

4.1 Do you think the buyer right for your practice?

You will want to sell to a buyer that has the necessary skills, qualifications, experience and ability to run your practice. This is particularly important in any deal where the seller is carrying risk in the transaction (such as an earn out agreement). 

The last thing a FSBO wants is to effectively sell to the wrong a buyer who post sale manages to lose too many clients. This type of decision can not only damage years of your hard work, but will more than likely have an impact on the final price that you receive if part of the terms of sale are dependent on future revenue streams.

4.2 Does the buyer think they can run your practice?

Assessing whether a particular buyer has the necessary ability to run your practice is a key factor for you and the potential buyer. The enquirer might conclude that your practice is not the right opportunity for them. So what you give them needs to inform their judgment too.

Practice owners have the greatest understanding of what it takes to effectively manage and run their business, whether it be the type of specialist work the firm undertakes, the type of client's the practice serves, or the management skills needed to handle and motivate key fee earning employees.

4.3 Are they the right buyer?

Individuals

A simple way is to ask potential purchasers for a copy of their resume.  Most brokers do this as part of their vetting procedure so there is no reason why a FSBO should not take the same course of action.  In many cases it may have been a number of years since the potential purchaser has put one together.

You can learn a lot from this, not just the content, but how professionally this has been put together. Resumes that appear to be rushed or show signs of little thought, care and attention do not suggest a serious buyer.  The amount of effort that a potential purchaser puts into their resume can be interpreted as an indication of the seriousness of their interest in your practice.  Serious potential buyers will be keen to impress.

Find out more from softer questions from 'softer' questions such as how long they have been looking to purchase a practice.  Often where buyers have been looking for a long period of time they are simply window shopping. 

Larger entities

If it is a larger partnership acquiring your practices, you may want to find out if they have successfully managed acquisitions before, what the corporate brochure looks like, and how quickly they respond to your questions.

4.4 A buyer’s financial resources

You need to identify your criteria for determining if potential purchasers have the financial capability to purchase your practice and ensure that this process is fair and reasonable.

Access to funds.

In fact, the buyer must have access to funds to:

•    purchase your practice.
•    supply the necessary working capital, if needed, to support the business post transaction.

Is the buyer going to the market for funds?

What is available in the financing market.? Sellers should consider researching the current state of the financing market themselves to get a firm understanding of the what offers are currently available to potential purchasers.  Good brokers that operate in the accountancy and tax practice market have a solid grip on financing trends and are quick to identify any weaknesses in financing arrangements proposed by buyers. 

Does the buyer have arrangements in place already? Serious buyers have cash and financing arrangements approved or are at least some way down the path of approval.  Potential buyers that have thought little about how they are to finance the deal or who offer vague reassurances on finances need to be treated with caution.

Brokers will initially request a disclosure of the cash available to fund the transaction.  Some go further and request personal financial statements and undertake credit checks.

Is the buyer financing the acquisition from selling their home?

In a number of transactions, cash will be derived from a buyer's home equity.  If that is the case then delve a little deeper. Find out if the process has started, if the buyer has opened discussions with their bankers and financial advisers: perhaps they are already prequalified for a business loan.

This is naturally a sensitive area, particularly for a FSBO transaction and needs to be treated as such.

5. What happens if buyers don't want to pre-qualify?

Well, you’ve saved yourself a whole load of potentially wasted time. If they do not want to pre-qualify, they are not serious buyers, and you should not waste your precious time on them.

Don't be surprised or concerned if a number of potential buyers do not allow themselves to be qualified. In these circumstances the prospect simply isn't in a position to purchase your practice, whether it is because they don’t have the financing capability, don’t have the experience, are curious competitors, or are ‘sharks’ looking for a bargain.

Regardless of the reason, don’t get drawn into chasing these individuals or relaxing the pre-qualification process.  Let them go on their merry way and instead focus your attention on ‘real’ potential purchasers. 

6 And finally...

Your time. To sell your practice down the FSBO route, you will need to effectively manage ‘your time’.  In fact ‘your time’ or rather the time that you can dedicate to the sale is likely to be a major bottleneck in the sales process.  Setting up a robust pre-qualification process you will avoid one of the most common errors many FSBO’s make when attempting to sell their practice.

A robust pre-qualification process also sends out a clear signal to potential purchasers about you.  It indicates you are a serious experienced professional FSBO practice that is interested in only dealing with serious buyers willing to pay a fair market value for the business.

A note on structuring the process. Brokering firms typically have a set a structured procedures in place that they use to ensure consistency in their approach to screening potential buyers, most of which start off with a registration form, a request for a resume, a confidentiality agreement and is followed up with an informal discussion/interview.  You may be surprised to hear that some experienced brokers actually pride themselves on their ability to quickly and easily identify 'tire kickers', a skill which has been honed over a number of years and through many practice sales.

Author: Dan Crowley, CGMA