- How to Create a Foolproof Buyer Vetting Process
- Setting a Timeframe
- Listing Your Requirements
- Evaluating Your Buyers
- Creating a Second Round For Promising Buyers
- Get a Verbal Offer Before an LOI
- Should You Accept an LOI From a Buyer You Haven’t Chatted With?
- What’s the Most Important Trait For a Startup Buyer?
- What Do I Do If a Promising Potential Buyer For My Business Stops Responding?
- What’s the Quickest Way to Shortlist Buyers For My Company?
- How Can I Know a Potential Buyer For My Company is Serious?
When you first list your startup on Acquire.com, your inbox might immediately explode with interested buyers. If your listing is under $100,000, you may even see a few offer letters from buyers you’ve never spoken with.
Tempting as it is to nab the first offer you get, this rarely benefits you. Instead, learn how to evaluate interested acquirers for your business to avoid wasting valuable time.
Working with a buyer before you understand them is a sure way to:
- Not get the deal terms you desire.
- Waste time in negotiations that are destined to fail.
- Create a rocky post-sale relationship.
Rather than wait for buyers to find you, we advise all sellers on our platform to actively and systematically court them. Here’s our guide for how to get started.
How to Create a Foolproof Buyer Vetting Process
We frequently see sellers who list their startups, fill out their information, and twiddle their thumbs as they wait for buyers to ask questions and make an offer. While you cannot chat with buyers until they request access to your startup, you can be proactive with the buyers who’ve asked to view your listing.
You need to create urgency in your deals. If a buyer senses that your startup will get picked up quickly unless they act, they will be much more keen to reach a deal at favorable terms. To do this, create a foolproof buyer vetting process, which includes:
- Setting a timeframe.
- Listing the traits and deal terms you want in a buyer/acquisition.
- Vetting your buyers.
- Creating a second round of talks with promising buyers.
- Getting a verbal offer before a letter of intent (LOI).
Let’s review this step-by-step below.
Setting a Timeframe
Keeping yourself and your buyers on a schedule keeps your company from sitting around with a “For Sale” sign for too long. Old listings may set off red flags for buyers. They’ll wonder why this seller hasn’t secured a buyer yet.
To avoid stagnant deals, create a time frame for how long you expect this deal to take. Your schedule might look like this.
- Talking to interested buyers and evaluating them – Two weeks to one month
- Interviewing shortlisted buyers – One to two weeks
- Price negotiations – One week
- Due diligence – Up to three months
Feel free to let your buyers know you expect to close this deal in a set time and give them a hard deadline for responses. They will take negotiations more seriously when they’ve made a verbal agreement.
Listing Your Requirements
Before listing your startup online, you should already know the type of deal you want. If you’re unsure, ask yourself the following questions:
- Do you want to keep working on other projects in peripheral industries?
- Do you want to sell your business and have limited involvement after the sale?
- Do you want your business to continue on the same path you were planning to build on?
- Do you care more about getting money from a sale and less about what happens to your business after? Or do you have employees you want to make sure are taken care of after the deal?
- Do you know which types of buyers you want to work with and which ones you do not?
- Are you open to other deal structures?
Now, create a profile for your “dream buyer.” It can be as complicated or as simple as you like. Some founders want a strong CEO to take command of a well-loved team. Others just want somebody who can buy their business outright with cash.
Your typical dream buyer trait list might look something like this:
- They are willing to pay in cash or with limited seller financing.
- They have background experience in the codebase used for the platform. That way, you don’t have to help them make updates.
- They do not make you sign a non-competition agreement longer than the standard two to three year period.
- They hope to run the company for at least several years and take all current employees with it.
- They believe in your company’s core values.
Evaluating Your Buyers
Now that you generally know your ideal buyer, evaluate your current buyers’ commitment, preparedness, and flexibility. Yes, your buyer pool will shrink. But you’ll eat better fishing from a small pond with a few healthy fish than an ocean full of time-wasters.
Vetting starts the moment a buyer requests startup access. At that point, they can see only information about your business you’ve made public. You should initially only reveal information that:
- Keeps you from repeatedly answering basic questions about your business.
- Allows mismatched buyers to self-exclude.
- Encourages qualified buyers to ask competent questions to learn more. These answers can be drip-fed to them the closer they get to your shortlist.
We require you to post certain info about your startup on Acquire.com and have even crafted this handy guide on how to make the perfect listing. You’ll always need to include:
- Your reason for selling
- Growth opportunities
- Tech stack
- Asking price
- Trailing twelve-month revenue (TTM) and annual recurring revenue (ARR)
You can include extra information in your profile as well. However, gatekeeping some topics will increase the buyer’s curiosity and eagerness. Perhaps wait to reveal the following until later conversations:
- Marketing channels you primarily use.
- Specific contractor types you use to run the business.
- Your willingness to hop on a phone call (you’ll want to save this for your most serious buyers).
- The place you operate your business out of (where your team members, engineers, and virtual assistants are located).
- Company culture.
When buyers know to ask about these topics, you can immediately tell they are more serious about purchasing and know a thing or two about running a business.
Chatting with Your Initial Buyers
In the initial vetting stage, you likely won’t have time to chat face-to-face or on a call with every interested buyer. Unless you possess a prodigious gift for gab, we recommend you tell buyers about your process straight off the bat and keep things in the Acquire chat bar until you can narrow down the list.
Tell them you hope to close the deal in X number of weeks or months and are fielding questions in the chat from buyers for now. To add urgency to the deal, mention that you’re talking to other interested buyers.
You want to give your buyers a clear path forward. Send them a list of questions to answer before you’re willing to get on the phone and have more in-depth talks with them. Feel free to go back and forth in the chat until you feel confident in their answers.
Here are some things you should talk about before shortlisting a buyer:
- Funding source
We’re going to dissect each of these questions below.
Asking Buyers About Their Background
Let’s be honest: people love talking about themselves, buyers included. Get them to open up about themselves, their experience, past acquisitions, and their goals for the future. At this stage, you can keep it brief. You just want a general picture of who they are and what they’re about.
Some great preliminary questions might include:
- What’s your work background?
- Do you have any experience in (marketing, coding, sales, running a team, etc.)?
- Have you ever worked in this field before?
While different skill sets are not always bad, you still need to consider what effects a buyer’s differences might have on your platform.
Consider what might happen if you sold a startup whose core product was an API to a social media influencer. Unless this influencer was also a developer or had hired one, you might need to stay on a year or two post-acquisition. At the very least, it’d be one heck of a laborious handover.
Pay attention to how willingly your buyers reveal information about themselves. If it feels like pulling teeth to get them to talk, it’s likely a red flag.
Asking Buyers About Their Goals
A buyer with a plan is a serious buyer. A buyer with experience is a helpful buyer. But a buyer with a plan, experience, and goals that align with yours is the ideal buyer.
Once you’ve got some background information, ask what your would-be buyer intends to do with your business. Then, ask yourself:
- Are these goals achievable?
- Are they a good culture fit?
- How can buying your company help them reach these goals?
While a clear goal is a strong signal, this may also immediately disqualify a few interested buyers. If a buyer plans to fire your staff and dissolve your brand, you may lose your legacy and, potentially, the respect of your teams. But if you were thinking of folding the business anyway, a buyer with a plan to restructure may be exactly what you need.
Learning About Their Funding Source
No, it’s not rude to ask, “How would you pay for this acquisition should we move forwards?” You should get it out of the way early.
In our marketplace, we let buyers verify their funds by sending in bank statements. If they elect to do this, we give them a verified checkmark next to their names (shown below). If this is a dealbreaker, ask your buyer to verify their funds on our platform.
However, if buyers don’t have the funds to complete the deal right now, you can still make it happen. We’ve recently partnered with online financier, Boopoos, to grant business loans for purchasing startups. Buyers pay these loans via percentages of your monthly recurring revenue (MRR), making them great for already-profitable businesses. However, they likely aren’t possible if you’re selling a pre-revenue startup.
Your buyer may also respond with a suggested deal structure to work around their current cash flow issues. Again, this is promising because it shows they understand how acquisitions work.
Creating a Second Round For Promising Buyers
Once you’ve selected the buyers you like, tell them they’ve been selected for the next round of talks and that you want to get to know them better.
We suggest getting on a phone call with your shortlisted buyers. Most studies show that phone calls help people feel more connected. On top of that, you can convey information much faster than a conversation over SMS.
What You Should Chat About With Your Vetted Buyers
In just fifteen minutes on the phone, you’ll know if you like your buyer, if they’re serious, and what the expectations are for both sides.
During these calls, you need to:
- Set a timeframe with each buyer for when you can expect an offer or LOI. Get a verbal agreement on the time and follow up if you don’t hear back.
- Fill in any information gaps from your previous conversations.
- Get a sense of their personality and their commitment to buying your business.
Make sure you leave this call with a sense of who your buyer is as a person, especially if your employees are part of the acquisition handoff. It’s your reputation on the line if the buyer runs your startup into the ground. Not all buyers are wise to their faults, so root these out early before you go further into negotiations.
Ask the buyer about their values, beliefs, and leadership style. What does startup culture mean to them? This should give you insight into whether they’d fit within your organization and do your legacy, customers, and employees proud.
Finally, once you get off the phone, you should have a strong sense of whether or not your buyer plans to actually buy your business and the price they will offer. You should also make sure your buyer understands absolutely everything necessary to draft an offer letter, including your rationale for your pricing.
After the Call
Now that you’ve inspected your shortlisted buyers, it’s time to do a bit of research on them.
- Look through their profile on Acquire.com
- Check out their LinkedIn
- Find their Twitter profile
- Connect with people in their network
If your buyer has acquired multiple businesses, look for evidence of successful acquisitions (like a trail of happy founders). Also, ask yourself:
- What’s their acquisition strategy?
- Do they seem like the kind of person who would purchase and operate your business with integrity?
- Would you be okay with this person staying in contact with you after the acquisition?
If you don’t see any further red flags, keep in touch and make sure your buyers send their offers when they said they would.
Get a Verbal Offer Before an LOI
Now that you’re in the final stages, your shortlisted buyers will likely do one of three things:
- Give you a verbal offer by chat.
- Send you a formal offer letter on our platform along with an LOI.
- Pull out from the deal if they are uncertain about the acquisition.
Unless a buyer agrees to meet your asking price in cash with no stipulations for different deal structures, you should expect to spend at least a week or two in negotiations. That may include further phone calls if you have lots to discuss.
We advise you to agree verbally on an eventual sale price before moving to the LOI stage. Locking in one buyer with an LOI before you’ve finished negotiating means cutting contact with other potential buyers until you sell your company or rescind the LOI. So you may need to start again from scratch if the deal doesn’t go through.
If a buyer sends you an offer letter with a price and deal structure you’re not happy with, come back to them and say “Hey, I appreciate your offer, but it’s not quite what I’m looking for. Let’s chat further about this.”
Once you’ve hashed out your desired acquisition price and deal structure, it’s time to select the buyer you like best, sign an LOI, and get your deal done.
Now you know how to evaluate buyers, so list your startup now and start some serious acquisition conversations.
For more helpful acquisition articles and videos, check out our blog.
Should You Accept an LOI From a Buyer You Haven’t Chatted With?
No, you should not. If a buyer lacks information about your business, something will likely come up that makes them pull out of the LOI later. Since you can’t chat with other buyers while under LOI, this can waste valuable time you could have spent warming up other buyers.
What’s the Most Important Trait For a Startup Buyer?
No one trait defines all good startup buyers, but we think responsiveness is the most important one. Since long acquisition processes can kill deals, you want eager buyers who are willing to get the deal done. If you’re waiting days or weeks for a response to a simple question, who knows how long a complicated process like due diligence will take.
What Do I Do If a Promising Potential Buyer For My Business Stops Responding?
Responsiveness is extremely important in a deal, and a lack of responsiveness from a buyer often means they are unenthusiastic. If one or two buyers are unresponsive, but others reach out, you should move on to your more enthusiastic options. Even if it might mean sacrificing some of your sale price.
If you find most of your buyers are unresponsive, that may signal something about your business’s offering is undesirable to the greater market. Perhaps give our blog on how to raise your valuation a read.
What’s the Quickest Way to Shortlist Buyers For My Company?
The fastest way to shortlist buyers is to give them opportunities to give you information and gauge how quickly they do so. This is a great way to test enthusiasm, knowledge, and responsiveness. You should also favor buyers willing to reveal detailed basic information like plans for your startup, funding sources, career background, and more.
How Can I Know a Potential Buyer For My Company is Serious?
The surest signs of a serious buyer are:
- Their responsiveness.
- The quality of the questions they ask.
- Their ability to negotiate.
Buyers that need to be pestered for a response or who send offers without any preliminary questions will likely waste your valuable time. If a buyer thinks your business is worthwhile, they will also be willing to change the details of the deal to make you happy.
The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.