When A Buyer of A Business Gains Exclusivity
A buyer of a business legally gains the exclusive right to purchase a business during a specified time period when there is a signed and agreed upon Letter of Intent or Purchase Agreement with the seller. Typically, a refundable deposit from the buyer is also placed into escrow is also required. Exclusivity in the context of business sales means that a seller may not accept other offers from other buyers during a specified time period and may only sell the business to the buyer who has exclusivity during a specified time period. Unless and until a buyer of a business gains exclusivity, the seller may negotiate with other buyers and may accept an offer from another buyer at any time.
Period of Exclusivity Negotiable
- It is in the seller’s interest to reduce the period of exclusivity that a buyer has to the greatest extent possible.
- This is because a seller may miss out on other offers from other buyers during the period of exclusivity.
- Moreover, the longer that a deal is ‘under contract’ whereby a buyer has the exclusive right to buy the business, the more opportunity the buyer has to walk away from the deal (and get their deposit returned).
- A buyer almost always has the right to walk away from the deal (with no recourse) if they are dissatisfied with the formal due diligence undertaken when the business is ‘under contract.’
- Unlike real estate, a business has goodwill and intangible assets that may change in value over short periods of time for a number of different reasons, and must be formally investigated during a formal due diligence process.
- In order to properly evaluate a business during formal due diligence, a buyer may request a comprehensive list of company documents including tax returns, payroll records, bank statements, balance sheets, company licenses, insurance certificates, and more.
- According to the terms of a Letter of Intent or Purchase Agreement which governs the formal due diligence process, the buyer is almost always given the right to walk away from the deal (with no reason given) once the formal due diligence process is complete.
- The seller, of course, will not want to waste their time and resources unless given some assurance that the buyer is serious about actually completing the deal.
- This is why it is crucial for the seller to have an opportunity to meet the buyer directly (with the business broker’s assistance and involvement) during the buyer/seller meeting.
- In this way, the seller can determine the buyer’s background, skills, and intentions with respect to the business.
- This will enable the seller to give the buyer an appropriate period of exclusivity.
- Most buyers receive about 30 days of exclusivity, but given the nature of the deal, the period of exclusivity given to a buyer may reach 90 days or more.
When Exclusivity is Established, Deposits Are Typically Refundable
A seller may often wonder why a deposit for a business is almost always refundable. Because a business has changeable and opaque characteristics that need further investigation, it is generally deemed unfair to require a buyer to forfeit a deposit for the purchase of a business. After all, it is not the buyer’s fault if – during a formal due diligence investigatory process – the buyer realizes that a business has flaws that were not readily discernible. For example, a business may have problems with its accounts receivable (specifically with customers who are late payors) that requires the buyer to have more working capital than anticipated. The very nature of business sales and the required due diligence that buyers must perform usually means that deposits are refundable.
Buyers Still Incur Expenses When Exclusivity Established
Even though the deposit for a business is usually refundable, a buyer of a business still may incur significant expenses in order to propose a formal purchase contract and in conducting the formal due diligence process. It is the buyer’s responsibility to propose the actual purchase contract in a business sale. Many buyers will have an attorney prepare the purchase contract which will of course involve significant attorney fees. Depending on the length and scope of the purchase contract (and accompanying documents), the attorney fees can be several thousand dollars. Additionally, many buyers will employ accountants in order to perform the formal due diligence on the business. This too may amount to several thousand dollars in accounting costs given the length and scope of the due diligence material.
Sellers May Retain Right to Back Out
- Once exclusivity is established for a buyer, the seller still may retain the legal right to back out of the deal.
- If a Letter of Intent is the legal instrument by which the buyer has established exclusivity, then the seller almost always has the legal right to back out of the deal until and unless the actual purchase agreement is signed.
- A Letter of Intent only is an agreement to have an agreement, and both parties may almost always back out with little or no recourse.
- A formal purchase agreement will usually still have contingencies such as the buyer’s completion of the formal due diligence process to its own satisfaction or the buyer showing proof of a lender’s commitment letter to the seller’s satisfaction.
- These provisions (among others) in the purchase agreement may serve as escape valves for either party.
- A more practical reason for the seller backing out of a deal occurs when the buyer does not engage in or complete the formal due diligence process in a timely way.
- The purchase agreement often has a timeline under which the formal due diligence must occur, and if the buyer (or the buyer’s accountant) is lax about taking the necessary steps to complete this work, then the seller may feel that the buyer is not serious about completing the deal and will want to back out.
Giving a buyer exclusivity over the purchase of a business is a very critical step in a business sale. Both the buyer and the seller should be well versed on what this means and its implications. The period of exclusivity should be carefully negotiated with the assistance of a professional business broker.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.