The market for good businesses has never been hotter than it is right now. The challenge is that we have very low inventory at the moment, because the desirable business listings are being snatched up quickly. This has created an interesting dynamic in our industry of business sales: a competitive market for buyers. Here we will share our thoughts on how buyers can make a competitive offer, one that is most likely to be accepted in this booming seller’s market.
Ok, so our thoughts here might surprise you. Our market is hot, but we don’t typically see too many multiple-offer situations in business sales. It does happen from time to time, and it’s more likely in this competitive market, but it’s not the norm. So, unless you know that the seller is currently considering more than one offer, from a strategic standpoint, we wouldn’t suggest going straight in at full asking price (even if you are prepared to pay the asking price). Now, of course, as the buyer you can offer whatever you want for the business, but just hear me out on this one. Make a good solid offer…something close to the asking price but leaving a little room for negotiation. From a negotiation standpoint, you don’t want to show all of your cards too early or look too eager. Furthermore, if a business has just come on the market, getting an offer right away at full asking price can actually “spook” a seller and make them think that they priced their business too low (even if that’s not the case). This is not what you want to happen either, so be careful with the price you offer. Talk to your business broker about what you are prepared to spend, but then plan out your offer strategically in advance.
Sometimes, the other terms in your offer (like escrow deposit, due diligence period, non-compete agreement, familiarization period etc.) are just as important as the purchase price. So, make sure that you discuss the other terms with your business broker so that they can advise you as to what is “normal” or “customary” and if you want your offer to be strong, go with the flow there. If you really need or want to ask for something that is out of the ordinary, make sure your business broker understands why, so that they can relay your reasoning to the seller.
Proof of Funds
In this competitive market, it is becoming more and more common for sellers to request seeing the buyer’s proof of funds before they accept an offer. So, if you want to stand out as a buyer, present proof of funds with your offer. That way, the seller knows that you are a serious buyer and that you have the money in the bank for your down payment or to purchase the business outright, should you come to a meeting of the minds and go under contract. You traditionally have two choices for proof of funds. You can either offer a bank statement (with the account numbers redacted, but your personal name or company name on the statement) or your bank can write a letter, stating that you have sufficient funds in your account for the down payment or purchase. The second option would be the best one for a buyer who doesn’t want a seller to see their total bank balance or any transactions.
Speak to an SBA Lender First
If you are going to be borrowing to purchase a business, make sure that you have spoken with the SBA lenders who have pre-qualified the business or another lender of your choice to make sure that there is nothing in your background or credit history that would prevent you from getting the loan. Basically, here you want to simply let the seller know that you’ve spoken to a lender (be specific about which one) and that they have given you an initial green light. We don’t really have Buyer Pre-Qualification Letters like they do in mortgage banking, but this is usually good enough for the seller to have confidence in a buyer as a borrower. Giving this information to a seller at the time of offer will make you appear to be a strong buyer, and the seller will have more faith in you being able to close the deal.