You’ve found a business that excites you and makes financial sense for you to move forward with purchasing. After getting detailed information about the business, you’ve had your initial meeting with the seller, and you are confident in taking the next step.
At this point, you are trusting the information that’s been provided by the seller, and once you are “under contract” then you get the chance during due diligence to investigate and prove that the numbers and operational info presented on the business are to your complete satisfaction. In order to get that due diligence period started, you need to come to a meeting of the minds with the seller on the terms of the agreement. Here we will discuss the steps we will take to help you get that business off the market and under contract.
The first step: discuss with your business broker your thoughts on what terms you should offer. Terms being purchase price, escrow deposit, closing date, due diligence period, familiarization etc. Get his or her expert opinion on what’s customary or normal to offer on some of the terms that you might not be familiar with. Your business broker should also be able to pull comparable sales for you, so that you can make an informed offer of market value with regards to purchase price. Remember, right now, it’s a seller’s market, so you want to make sure that your terms are competitive. Bounce your ideas and thoughts off of your business broker, and the two of you can come up with a strategic plan for your offer, so that not only do you get a deal that you are happy with, but it’s a deal that the seller will accept as well.
Broker Writes Official Offer
In small business sales, we don’t normally work with a Letter of Intent or LOI. Those are more commonly used in big corporate purchases. So, if you want to make an offer, we have a standard Asset Purchase Contract that we normally use. Of course, as a buyer, you can submit whatever offer you want to, but remember, you are working with a business broker for their expertise in business sales, and we suggest using the standard contract.
Once you’ve talked with your broker about the terms you want to offer, they will write up your offer and then send it over to you for signatures. Once you sign the offer, then it will be submitted to the seller for consideration.
Wait For Seller’s Response
This is the most difficult part of the process…waiting. The time that we normally give as a deadline for the seller to respond can be anywhere from 24 hours to a week, so make sure you ask your business broker how much time you have given for response, just so you know when to expect to hear back from the seller. Different situations will necessitate a longer or shorter response time. For example, if you know this business is popular, and you’ve submitted your very best offer, in hopes of the seller accepting, then it is a strategy to give them a shorter window for response time, maybe 24-48 hours. Note, if you are submitting your offer on a Friday afternoon, that’s not a smart timeframe, so you would want to give them at least until the end of business on the following Monday. For some reason, the seller might request more time for a response, for example if they are on vacation or if they are having surgery, or whatever the case might be, so just be prepared to be flexible and patient with this part of the process. If the seller fails to respond before your offer deadline, then your offer becomes null and void.
The seller has three choices when it comes to responding to your offer. They can flat out reject it, they can accept it as-is, or they can send over a counteroffer. A counteroffer is what happens in most cases and is the most likely response to get from a seller. There will be specific items from your offer that they are not in agreement with, and they will counter those specific terms. There will be terms in the original offer that they are in agreement with as well, but those won’t be addressed. We normally put all counteroffers in writing, because we want to keep a record of what’s been offered and agreed to. In business sales, there doesn’t tend to be too many counteroffers back and forth, usually it’s just one or two before the parties reach an agreement.
Once a meeting of the minds has happened, both buyer and seller sign all pages of the offer documents, including the original offer and all counteroffers. The reason that all documents need to be signed is that there are terms in the original offer and in each of the counters that have been agreed to and all of the documents are part of the contract. Once everything has been signed and the contract has been executed, then you are officially “under contract” and the due diligence period begins.
After the contract is executed, the earnest money deposit needs to be paid to the escrow holder (who is normally the closing agent) for them to hold in their escrow account. You need to then get together all of your due diligence questions and document requests together for the seller. This is everything that you want to verify, investigate, and research regarding the business’ financials and operations. If you find something that you don’t like or the information that the seller originally provided doesn’t stack up, then you can cancel your contract during the due diligence period and get your deposit back. If everything looks good to you, and you are happy with what you’ve uncovered in due diligence, then you will be moving forward out of due diligence and towards the closing table.