do you really pre-qualify buyers?
Have you ever been concerned about your buyer’s actual qualifications? Of course you have, and it happens every day in our world.
By Steve Mariani
April 19, 2019
Once you ask a potential buyer for his personal financial information and his resume’ to determine if he can actual secure financing, you are now making the decision that he can purchase the business he is interested in. That is straight forward for the most part. Where it gets tricky is when you receive that information you have questions about it. Did you also demand the accompanying bank statements? Require his credit reports? How far do you go to pre-qualify buyers before introducing them to more of the business financials or the actual owner? This has been a concern for brokers since the beginning of time.
Pre-screening applicants
Over the years, I have found that many broker offices do have items in place to determine the quality and capabilities of a potential buyer. Some go as far as to pull credit and drill down on specific information provided by the buyer on their personal financial information. Although very few go to these lengths, most have some type of practice in place to retrieve personal information upfront and, if it looks like it makes sense, they move ahead. The real concern is when the information provided just doesn’t make sense. Such as finding high personal credit card debt when they claim they have a few hundred thousand in the bank accounts, or they have every vehicle mortgaged along with a second mortgage on the house. Would you ask the tough questions?

When we see a candidate that has made over six figures for the past number of years, but owes on everything they own, that’s concerning and we will ask that person, “what have you spent your money on these last few years?” We drill down on each and every candidate we pre-qualify because if they don’t have what they say they do, or cannot prove to us via cash accounts, no pre-qualification letter will be issued. What we typically see used is a simple one page net worth statement required by most broker offices. No back up materials and no true buyer screening done with the hopes of this information being true. We think you should stop doing this. That’s right, stop pre-qualifying candidates. What I really mean is, if this business listing requires any level of financing, let the lender do this for you. Most broker offices have lender contacts that can be used for pre-qualifying. Maybe they do many deals with them, or maybe only one or two a year. In any case, most lenders would be happy to pre-qualify a buyer upfront for some level of financing or purchase price. This true level of pre-qualification is more important today then ever before due to the fact that spending a month with a buyer that cannot truly be financed only builds frustration on many levels and reduces a broker’s credibility.

This not only takes the burden off your office and the broker reviewing this buyer’s information, but also brings another level of security to a seller when you explain they have been pre-qualified by a lender. If you are counting on a lender for buyer screening, then you must also understand what they will require and how long will it take. Be sure they’ll stand behind their letter and has a true sense of securing an approval should this buyer locate a business.

What we see
So now let’s go through some of what we’ve seen from buyers in the past that claim to have money in the bank. True story: a potential buyer completed the broker one page form, and explained he had $175,000 in cash and was considering a business selling for $650,000. We got a call from the broker saying that “something just didn’t feel right” with this buyer. He went on to say that it just didn’t add up when he looked at all the remaining parts of the buyer’s information. He asked the buyer to contact us directly and I noticed he was local to our office, which is not typically the case. I asked the buyer to come in, and we sat down to go through his actual financials. I also asked the buyer to bring their bank account statements, as we could not verify his ability without them. Much to my surprise, the buyer had over $900,000 in his checking account. Not what I, or the broker, had expected. My immediate next question was “why did you mislead the broker?” His answer, although surprising me a bit, was, “I just didn’t want the broker to know my cash amount because he would have tried to show me bigger businesses.” I had no response, I get it.

Now we all know that is not the typical buyer, and his scenario has only crossed my desk once in so many years. The typical answer is that some funds are coming from parents, some from my uncle, some from a friend, and the list goes on and on. Usually, they scramble to explain how the can come up with the money. That does not fly with our firm, and shouldn’t with yours either. We pre-qualify buyers every day for broker offices throughout the country, and here is our criteria with no exceptions. We must have all four of the following, and they must be complete, current, and accurate:

  • Joint (if married) completed personal financial statement
  • Current credit report
  • Complete resume
  • Bank statements supporting personal financial statement accounts

We leave little room for error here as we are less concerned about the borrower, as opposed to the broker, who counts on our letter. Our buyer pre-qual letters are produced within two hours of all requested documentation being submitted and comes at no cost or obligation to the buyer in any way. We want the broker to know the buyer’s level and chances of securing financing without question.

We suggest that if you do not have a lender relationship that can supply this level of service to your office then explore additional lenders. This is something you should have a direct source for and if you have a lender relationship, require them to assist on this item but be sure they do a complete screening, it can save your transaction down the road.
Diamond Financial Services