We sometimes work with buyers who lose out on a great business because they’re hesitant to make an offer. Although we cover this topic when we begin working with a new buyer, the lesson sometimes gets forgotten when it’s crunch time. Here’s a helpful primer on the importance of this critical deal starter:
1.An Offer Is a Starting Point
We’ve refined a two-page offer form that has worked almost perfectly for us over the years. It lays out the expectations for how the deal will get done – the financing, leasing, timeline for due diligence, expectations for the seller, need for the asset purchase agreement, etc.
It’s designed to protect you – the buyer – in case you find out something you didn’t expect during the due diligence period. The offer usually comes with earnest money of $5,000 to $10,000 minimum.
2.A Deposit Shows You’re Serious
Putting money in escrow shows the seller you’re serious. It may even keep him from talking with competing buyers. Without it, how does the seller know to prioritize time with you to answer your questions and help you understand the business? He might otherwise write you off as a “tire kicker”.
Both the seller and the broker will take you more seriously and work harder for you when you have some skin in the game. By the way, the deposit is refundable.
3.It Opens Up the Books
You almost always have to put an offer on the table before you get access to the detailed financial information you need to make decisions. Sellers won’t take that risk without knowing you’re committed.
And the way you handle this part of the negotiation will set the stage for how you’ll relate to the seller throughout the deal and the transition. Starting off by demonstrating you’re serious can smooth the negotiations as the deal progresses.
4.An Offer Is NOT a Deal
While your earnest money backs up your intentions, it doesn’t represent a terribly large risk. Your business broker will typically keep the deposit in escrow, and it’s rare that the buyer doesn’t get that money back. In one case, Apex kept an escrow payment because the buyer backed out while driving to the closing and told us to keep the escrow!
As described in point #1 above, our standard offer document includes multiple contingencies that allow the buyer or seller to back out if the deal doesn’t proceed as expected. It saves both parties the cost of hiring a lawyer too soon. And it establishes the negotiating process right up to the much-more-detailed legal asset purchase agreement required to close the deal. This document also allows the buyer to start the loan application process.
If you find you’re truly interested in buying company, we hope these principles will help give you the courage to make a serious offer – before the deal slips through your fingers.
If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!