We have talked about how to go about selecting a business. You get that none are perfect and that you will never have enough information to feel 100% confident about your choice.
You have decided that all things considered—after reviewing the documentation provided by your broker, your meetings and discussions with the business owner and your personal visit to the business—a business will work for you.
It is now time to make a conditional, non-binding offer.
Yes, now… before due diligence.
There is no point in wasting your time, money and energy conducting diligence on a business without a reasonable agreement on the price, terms, closing date, training and transition program, vendor financing, security, assets being conveyed and other issues. Accept that the recast financials and other details your broker has provided about the business are correct. You have met with the owner and had an opportunity to ask many questions about the business prior to reaching this point.
What goes into an offer to buy a business?
Whichever its form-an Offer to Purchase, a Letter of Intent (LOI) or a Memorandum of Understanding (MOU)-the offer will be dated and signed, provide a time frame for response and commit both parties to confidentiality.
The offer will:
- lay out the price and terms the purchaser is prepared to offer;
- set a date for closing, with conditions and timelines to be met before closing (and perhaps some for after closing);
- specify how and when the purchase price is to be paid and under what conditions;
- set out expectations for the seller’s responsibilities after closing, such as training of the purchaser or continuing employment.
Your broker will help you in drafting the appropriate terms and conditions. Our offers always contain a clause making the offer conditional upon structuring the transaction and drafting an agreement of purchase and sale that is acceptable to both parties and their legal advisors. The offer then has no more enforceability than a Letter of Intent or Memorandum of Understanding. Its purpose is to set out the terms for a legally binding agreement of purchase and sale that will be subsequently drafted by the lawyers.
This allows the parties to negotiate, through their business broker, to reach details acceptable to both parties without spending money on legal advisers until later in the process.
About the deposit
A deposit will be required as proof of a bona fide intention. The deposit will be held by the business broker in trust until there is an accepted offer; it will be refunded if the deal doesn’t close. In Ontario, business brokers must be licensed realtors and the trust fund is guaranteed by the province.
This is true when buying a business in other provinces as well. Where this is not the case, or if the broker is unlicensed, the deposit is generally held by a notary or lawyer acting on the transaction. In such case the deposit needs to be accompanied by an escrow agreement stipulating that the deposit will be repaid to the purchaser if the transaction does not close and specifying any conditions associated with such repayment.
You have likely been told that in negotiation you always want the other party to make the first offer. Not so in purchasing a business, where your offer serves many purposes.
The offer begins the negotiating process and indicates the seriousness of your intent. There is nothing wrong with making your first offer well below the asking price, if there is one, for the business. You have to start somewhere. Asking your broker what the seller will take is fruitless—they will not really know until the seller accepts an offer.
What to offer
When I started in business brokerage I was naïve enough to think that I knew what a seller would accept. However, having had many sellers refuse offers that I thought they would take and many sellers accept offers that I believed they would refuse, I learned that my crystal ball did not work.
The only way to establish what the seller will take is to make an offer and find out. The offer also helps us gauge the terms and conditions that you and the seller would each like.
Putting the terms and conditions you would like on paper, lets the seller then come back with their preferences and priorities. The offer and subsequent negotiations are done through your broker— not directly. When the deal is done, you and the seller will have to work together for some period of time. You need to remain friendly and cordial. Given that you each start with opposing goals, you must work through your broker.
The offer will be conditional upon financing on terms acceptable to the purchaser and upon completion of due diligence—financial diligence, operational diligence, market diligence, legal diligence, and so on—to the satisfaction of the purchaser.
So the offer is a starting point for negotiations and provides an opportunity to learn what is important to the seller. Your broker will present the offer to the seller, discuss it with them at length and assist them in preparing a counter offer.
Rarely is a first offer acceptable. Be open-minded to the seller’s concerns and do not be shy to put forward yours. The goal is not to beat the other side, though, but to arrive at an acceptable set of terms and conditions that will work for you and the seller.
Too often buyers miss out on great businesses because they are overly concerned with beating down the price. Keep in mind that most businesses increase revenue by 15% to 30% the first year after purchase. This is not because buyers are more experienced or know more than the seller. It is because they bring energy, a new perspective, different skills and enthusiasm to the business.
For more tips on buying an existing business, see and download our Top 10 tips for buying the right business for the right price and terms.
Previously published in our At the Broker’s Table series.