Defining an Offer and Its Importance to Buying A Business
An offer is the most important step that a buyer makes toward actually purchasing a business. Legally, an offer is a specific proposal necessary to create a contract with another. An offer and an acceptance to the offer creates a contract. In purchasing a business, buyers should thoroughly prepare themselves before making an offer, and the offer should cover key terms and issues that are essential to creating a binding contract.
Buyers Should Perform Preliminary Due Diligence Prior to Making An Offer
After signing a non-disclosure agreement, qualifying oneself, and receiving the confidential listing information package from the business broker, the buyer should immediately conduct preliminary due diligence on the business. This type of investigation on the business is distinctly different from formal diligence which occurs after the buyer and seller agree upon a written offer which should grant a period of exclusivity.
Purpose of Preliminary Due Diligence
The purpose of preliminary due diligence is giving the buyer a sufficient level of information so that he or she can make an offer on the business. There should be as little surprises as possible during the post-contractual formal due diligence phase, so all material information on the business should be disclosed to the buyer during the preliminary due diligence phase.
Examples of Preliminary Due Diligence When Buying A Business
- First and foremost, a buyer should closely read and analyze the confidential listing information package that is presented by the business broker.
- All questions should be written down and addressed by the business broker or to the seller.
- A buyer may request further financials which presented to the buyer in preliminary due diligence so long as such information is available and not too sensitive or involved in nature so that it should be properly disclosed during formal due diligence.
- Normally, a buyer also meets with the seller and tours the business as a part of their preliminary due diligence.
- During preliminary due diligence, a buyer should employ the internet and do their own legwork to ascertain other merits of the business such as online reviews, the location and surrounding area, foot traffic, and the competitive landscape.
Preparing to Make A Written Offer on A Business
Once a buyer’s preliminary due diligence is complete, a buyer must decide how exactly they will make an offer. Particularly if the buyer has little business experience, he or she may wish to consult with an attorney. A professional business broker may also guide a buyer through this process. In either case, buyers should do their homework and understand the legal implications of making an offer, as well as their desired legal structure of the transaction itself.
Two Ways to Make An Offer for A Business Purchase
Buyers may either propose a Letter of Intent (LOI) or an actual purchase contract when making an offer for a business. An LOI is simply an agreement to agree on the framework of a deal. The LOI normally contains a provision for a (refundable) deposit, should spell out all the key terms of the deal, and give a buyer a period of exclusivity. But it is not the actual contract and is not binding on either party. Buyers typically propose an LOI for the simple reason that it is not necessary to hire an attorney to do so. Proposing an actual purchase contract which contains the entirety of the agreement is usually prepared by an attorney and is binding for both parties.
Choose the Desired Structural Format of the Transaction Prior to Making Offer
A buyer must decide whether the business transaction is an asset purchase deal or a stock purchase deal. The different structural formats of the transaction may be unfamiliar to some business buyers.
Asset Purchase Deals Limit Liability
An asset purchase deal means that the buyer forms their own legal corporate entity and purchases the assets (both tangible and intangible) of the business (they do not purchase the actual corporate entity of the business). This type of structural format is the norm and is used in the vast majority of business sales. Here, the buyer does not incur the liability of the corporate entity that is selling the assets.
Stock Purchase Deals Are Rare Except in Healthcare Sales
A stock purchase deal means that the buyer individually purchases the actual corporate entity of the business being sold. The buyer thus inherits and assumes all the liability of the corporate entity. Sometimes though the buyer will gain a big advantage in pursuing a stock purchase deal because the corporate entity will have non-transferable (or difficult to transfer) licenses or insurances contracts. In healthcare transactions, for example, buyers may choose a stock purchase deal because it will ease the license transfer process and is the only realistic way that the seller’s insurance contracts may be transferred to the buyer.
Key Terms That Buyers Will Include in Offer for Business Sales
- An offer should communicate all relevant terms of the deal so that both sides are clear on the framework of the deal and what is wanted by the buyer to consummate the deal.
- The offer should of course have the offered price along with how the deal will be funded.
- If the seller is asked to hold a Note, the offer should explain the terms of the Note.
- The offer should always have a closing date and a timeframe in which formal due diligence will be conducted.
- The content of the buyer’s formal due diligence request list should be included in the offer.
- If the formal due diligence request list is not in the offer, it should be at least clear to the seller what kind of information the buyer will be requesting during the formal due diligence.
- If the buyer is asking the seller to sign a non-compete agreement, its terms should be contained in the offer.
- Any post-closing training period should be contained in the offer.
- The offer should address the issue of a deposit and its refundability.
- All other terms, conditions, or contingencies should be in the offer so that there are no surprises to the seller.
The better prepared the offer, the less surprises there will be and there will be a far higher chance of a closed transaction
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.