Your time is your most valuable commodity. The simple fact of the matter is that many “buyers” are not truly buyers. In contrast, they are often window shopping or acting out a fantasy of buying a business. In other cases, they would only plan to buy if they were to find the “deal of the century.” The last thing you want to do is waste your time trying to work out deals with people who aren’t serious or qualified buyers.
The Plus and Minus System
The best way to find a serious buyer is to use a “plus and minus” system. This system will help you weed out the window-shoppers from buyers that are truly worth your time.
First, let’s evaluate factors for which you’ll want to deduct points. If a buyer needed outside financing, then subtract 4 points. Likewise, if a buyer has been looking for 6 months or more, you’ll want to also subtract 4 points. If a buyer has no cash available, you should subtract 3 points. Additionally, if a buyer is currently working in the corporate world, you should also subtract 3 points. These are the 4 largest reasons to subtract points, but they are not the only reasons.
Below are a few reasons to subtract 2 or 1 points from a buyer’s rating.
- You learn the spouse is not supportive – Subtract 2
- Prospective buyer uses a legal pad or clipboard and takes copious notes – Subtract 2
- The buyer indicates that they are in “no rush” and want to find the perfect business – Subtract 2
- The buyer is under the age of 25 or over the age of 62 – Subtract 1
- The buyer is currently renting even though he or she has lived in the area for some time – Subtract 1
Factors to Add Points In
There are also many factors that would make a buyer fall onto the “plus” side. If the prospective buyer does not currently have a job or has just resigned from their job, then add 3 points. Likewise, if a prospective buyer acknowledges that books and records are not the only metrics by which to judge a business, add 3 points.
Add 2 points if a buyer has enough money to buy the business and another 2 points if the buyer currently has no dependents. If a close relative or family member currently owns or has owned a business in the past, then add 2 points. If the buyer is between the ages of 25 and 62 add 1 point. If he or she is a skilled worker or professional, add 1 point. Finally, if the buyer does not consider location to be a prime consideration, add 1 point.
This streamline, straightforward and relatively simple system does work. Use this system consistently, and you will quickly eliminate a large percentage of window shoppers. While no system is perfect, this “plus-minus” system for accessing prospective buyers will save you countless hours and many potential headaches.
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Mass Mutual Life Insurance produced an ownership transition survey back about a decade ago. The survey results were based on feedback and answers from family-owned businesses. It produced some very interesting results, and is worth examining even today. While the survey at this point is quite outdated in terms of the timeline, there are still many valuable nuggets of information to be gleaned from it. Let’s dive in and take a closer look at the numbers and what they can tell us for 2021 and beyond.
While the Mass Mutual Life Insurance ownership transition survey had a range of important points, the one that leaps right off the page is the fact that a whopping 80% of family-owned businesses are still being controlled by their founders. A large percentage of those founders are Baby Boomers who will have little choice but to retire in the next few years.
The survey indicated that 55% of CEOs over the age of 61 or older have yet to choose a successor. This fact serves to emphasize the fact that a “retirement wave” will hit family-owned businesses, and this will lead to some interesting shifts and opportunities. And while the survey indicated that 13% of CEOs state they will never retire, the reality of the situation is that ownership will eventually change hands. Business brokers can expect to see an unprecedented wave of interest in their services. Additionally, prospective buyers will also have a highly unique opportunity to buy established businesses.
The survey also indicated that 30% of family-owned businesses will be changing leadership within the next five years. Of course, with that change of leadership, many possibilities open up, including the possibility of selling. However, it is important to note that while there will be a “retirement wave” amongst the Baby Boomers, not all businesses currently owned by Baby Boomers will be placed on the market.
The survey noted that 90% of businesses currently plan on remaining family-owned, and 85% of businesses plan on having their next CEO be a family member. However, it is important to keep in mind that even if these numbers were to hold true, that means at least 10% of businesses will be up for sale.
It is likely that this number is far higher now than when the survey was conducted due to the aging nature of the Baby Boomer population and owners looking to sell because of pandemic related issues. Simply stated, there will be no shortage of businesses for sale in 2021 and beyond.
Another important aspect of the survey to consider is the fact that family-owned businesses are not prepared to sell. According to the survey, 20% of family-owned businesses have not completed any form of estate planning, and 55% of family owners do not have any formal company valuation for estate tax estimates. Combine these statistics with the fact that 60% of businesses do have a written strategic plan, and it becomes clear that family-owned businesses, especially those considering selling in the future, are most definitely in need of professional assistance. Many family-owned businesses are ill prepared for the future and have a range of vulnerabilities. Business brokers and M&A advisors are uniquely positioned to provide those services.