Defining an ‘Offer’
An offer is the critical 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.
Preliminary Due Diligence Prior to Making An Offer
After signing a Non-Disclosure Agreement (NDA), financially 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 due 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.
- This information normally includes tax returns, profit and loss statements, an asset list, and specific company information (such as its website, address, and lease terms).
- All questions should be written down and addressed to the business broker.
- A buyer may request further financials prior to making an offer so long as such information is available but this is somewhat rare.
- The additional financials must not be too sensitive or involved in nature.
- Otherwise it should only be disclosed during the formal due diligence phase.
- Often, 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, spells 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.
Structural Formats of the 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 and is worth reviewing. Before making an offer it is crucial to understand in what legal format the offer will be made.
Asset Purchase Deals Limit Liability
An asset purchase deal means that the buyer forms their own legal corporate entity and purchases the assets 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 its assets. For this reason, it is the most common type of legal format of making an offer.
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 as its new shareholder. As such, it is rarely employed by buyers as the legal format of making an offer. There are exceptions where the buyer will want to retain the corporate entity – and specifically the tax ID number. In healthcare transactions, for example, buyers may choose a stock purchase deal because it will ease the license transfer process if the buyer retains the tax ID number of the seller’s corporate entity. It will also help the buyer retain the seller’s insurance contracts.
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, then 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. This greatly helps the chances for a successful transaction.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.