Get Used To Making Offers If You Want To Buy A Business

It is quite common for prospective business buyers to spend an inordinate amount of time in the looking and analyzing stages but one cannot expect any meaningful results until you get into the habit of making offers if you truly want to buy a business.

Don’t get me wrong, the decision to present an offer should never be done recklessly. Conversely, it is a critical aspect to the process and one that every business buyer must become comfortable with doing. The fact is that nothing happens until someone makes an offer.

A few things every buyer must keep in mind:

Making an offer gets the ball rolling. It is the only vehicle that the buyer has to get a true measurement of what the seller is really thing. Sure, there is an asking price, but that is not the purchase price. Yes, of course, many sellers will say they will do a cash-only transaction, but that is just talk, and rarely happens. Until the pint that a buyer documents an offer, the parties are simply engaged in posturing. It’s all talk.

If you really want to take the seller’s temperature, you have to make an offer.

Furthermore, a buyer who presents a written offer immediately separates themselves from the typical throngs of lookers that have inquired about the business.

Letter of Intent or Purchase Agreement?

Personally, I prefer using a full blown Offer to Purchase whenever possible. It addresses far more components to the deal, and leaves less room for ambiguity later on. However, it is not always reasonable to draft a comprehensive Purchase Agreement and so a Letter of Intent is the route to go.

A Letter of Intent (LOI) works best when:

• A buyer wants to quickly tie up the deal (or seller)

• The seller will not provide the buyer with adequate financial data until an offer is in place. While you need your attorney’s input, an LOI will cost far less to draft and will surely make sense if you soon discover that the numbers are not what was initially represented, which is far too common an occurrence.

Template Agreements

When a business broker is involved in the deal, they will provide the buyer with a template purchase agreement to use. Some even insist that a buyer MUST use their form which is completely ridiculous, so do not allow yourself to be bullied into that situation. On the other hand, these broker agreements can usually provide a buyer with an excellent template from which to draft a more comprehensive and applicable agreement. And, they can usually save a buyer quite a bit on legal fees by at least having a template from which their attorney can work instead of drafting a brand new agreement.

In the cases where a broker may provide you with an agreement template, add in all of the specific conditions particular to the deal and then allow your attorney to clean it up and “beef it up” for you.

The Real Issue

It doesn’t matter whether you use an LOI or full Purchase Agreement or a broker’s template. The big issue here is that you have to make offers. Some will be flatly refused, others will launch serious discussions that will not result in a deal, but one will certainly lead to your purchase of a business.

I can understand how some buyers may be apprehensive about making offers, but once you get used to putting your terms to paper and in front of a seller, the entire deal dynamic shifts and the discussions become instantaneously more productive between the parties. Plus, that is when the fun really begins. By getting over the fear and into the habit of making offers, the entire business buying process will accelerate in a positive direction and you will be that much closer to getting a deal done.

Here's a very helpful about about deal negotiations and making an offer

Comments

[Charlie Vlahos]

As usual good info. I caution those who think having a lawyer write up a LOI is the best way to go. Let the Broker write up an Offer To Purchase which would be subject to a more formal contract...Do not give a lawyer an opportunity to start commenting on anything until a deal is at least past initial due Diligence. 90% of lawyers will screw up the deal if you get them involved too early. Of course if a Buyer or Seller wants to go to his lawyer - you can't say much - but if I were you I'd keep searching for other Buyers!

Give a lawyer an opportunity to review someone elses documents guarrantees changes in the document and more expense - even before the Buyer has a chance to really investigate the business. Oftentimes these changes require negotiations in language that will be clearly spelled out in the contract - why negotiate them in the Offer? It is best that a Seller & Buyer after they have agreed on the basic terms have a road map on how the deal will proceed. An LOI in many cases does not get into that much detail. The sooner the Buyer can begin Due Diligence the better. There's a time for the expertise of a lawyer in a deal - but that is after the deal is a deal.

RP Comments: Excellent input. However, I cannot in any way suggest that a buyer ever submits an agreement, regardless of whether it is non-binding or not, without the input and review of a competent and experienced attorney.

[Chris Khoo]

It's interesting isn't it - if buyers are interested in the business, I always encourage them to put in an offer. And 95% of the time, they don't - they prefer to wait for every single bit of information they can get. By then, someone else has already got it under contract.

I feel sometimes, knowing less when putting in the offer gives you extra time and potential bargaining chips during the negotiation. Oh well, c'est la vie!

Chris

[Rockwell Marsh]

I agree, making offers is a required habit to get into. In fact just as important, visiting sellers is a required habit to get into if you are going to get a deal done.

However, I would not use a purchase agreement to make the offer. That would instantly set in motion a bunch of lawyers before you even get an agreement on valuation and structure. I make my offers with a short LOI containing all the key ingredients: valuation, deal points, paper, dd, employees and contingencies. The seller can look at it, understand it and decide whether we are on the same page.