How to Make Offers to Buy a Business
You had decided to buy a business instead of starting a new one. You chose the industry after studying the market trends and emerging opportunities for its growth. Fortunately, it is an industry that matches your skills and one that you are familiar with. You have looked at businesses for sale and narrowed your choice to the right company. You want to make an offer but you are not sure. There are so many unknowns. You read the sellers preliminary information and you want more in-depth scrutiny of the business. How will you proceed?
Access to the “real” numbers is crucial when you buy a business. A business owner is reluctant to share his company records even if he or she has put up the business for sale. If you put yourself in the sellers shoes, you will understand. The seller is contacted by all sorts of strangers who ask for the companies books and records. Some just look; others are interested but lack the financial capability. Some may have the money but are unwilling to pay the price the seller is asking. Or worse, a competitor may send someone to check up the business. How will the seller know who the serious buyers are?
You, the prospective buyer, who finds the business promising, should present a written offer to buy the business. This shows the seller that you are serious about making a deal. The seller will now see you in a different light and open his books and records for you to study (usually after you sign a confidentiality agreement). This offer to buy sets the wheels in motion.
Written offers convey you are different from the “lookers” who just inquire about the business. Offers to buy are usually non-binding and tentative, with clauses to back out of the deal if you discover that the numbers are incorrect, if you do not get loan approval, etc.
The Letter of Intent
This is a useful tool and can be used as the basis for further negotiation with the seller. It summarizes the initial major terms of the proposed transaction such as the price and terms and the timing for future steps, so you can start the “due diligence” investigation of the business. If the listed contingencies are not met, you can walk away from the deal. Although a letter of intent or LOI is a non-binding document, you should not look at it as anything less than a true commitment, and the seller should consider this as a serious initiative on your part. This demonstrates the mutual sincerity of both parties to get the deal done.
The Offer to Purchase
This is a more comprehensive document that details the negotiated terms and conditions. This includes all of the terms, conditions, warranties, non-compete conditions, inventory, financing, transition and training, leases and contracts, among other things. This discounts any ambiguity that may later come up. Once all the terms and conditions are met, the Offer to Purchase becomes binding.
The Brokers Proposal or Offer to Purchase Form
If you engaged the services of a business broker, he or she may offer you a standardized or ready-made printed form, which covers most of the common details in an offer to buy a business. Make sure you only sign this form after you consult with your lawyer. You may just use this as a draft or guide in constructing your own offer.
You will have to decide how you will present your offer. Once the seller receives the offer, the transaction speeds up and becomes more productive. You will need a lawyer and an accountant or financial advisor from the time you will craft your specific written offer to buy the business to the closing of the deal. This will cost money, but it is important to consult with professionals so you understand the details and to protect yourself from potential liabilities.
If there are no surprises from your due diligence (that can cause you to back out of the deal), you can proceed to sign the final formal purchase-and-sale contract which is legally binding. By making offers today, you could wake up one day as the proud owner of a great business. Are you ready to start making offers now?