Armen Nazarian Has Advice On Making An Offer To Buy A Business
Armen Nazarian Has Advice on Making an Offer to Buy a Business
Youve decided to buy a business, instead of starting a new one. Youve chosen an industry familiar to you that matches your skills, after studying market trends and emerging opportunities. Youve looked at businesses for sale and narrowed your choice to one company. You want to make an offer, but youre unsure. There are so many unknowns. Youve reviewed the sellers preliminary information, but you want an opportunity to scrutinize the business. How will you proceed?
Access to "real" numbers is a crucial part of the negotiating process when buying a business. A business owner is reluctant to share company records, however, even if the business is up for sale. All sorts of strangers asking to see the companys private documents contact the seller. Some just look. Others are interested but lack the financial capability. Some have the money but are unwilling to pay the asking price. Or worse, a competitor may send a spy in the guise of an interested buyer to check up on the business. How does the seller identify serious buyers?
Armen Nazarian of Capital 1 Business Brokers says that a prospective buyer, who is serious, should present a written offer to encourage the seller to open the books (usually after a confidentiality agreement has been executed between both parties). An offer sets the wheels in motion.
Written offers, which separate the real prospects from the "lookers," are usually non-binding and tentative, with clauses to back out of the deal if the numbers are inaccurate or the buyer fails to secure financing.
The Letter of Intent is a useful tool and can be used as the basis for further negotiations with the seller. It summarizes the major terms of the proposed transaction, such as price, conditions of sale, and the timing for future steps, and launches the "due diligence" process, allowing the buyer to fully investigate the operation. But if listed contingencies are unmet, the buyer can walk away from the deal. Although a letter of intent or LOI is a non-binding document, both sides should view it as a true commitment to get the deal done.
The Offer to Purchase is a more comprehensive document that details the negotiated terms and conditions, including warranties, non-compete clauses, inventory, financing, transition and training, leases and contracts, to minimize any ambiguity. Once all terms and conditions are met, an Offer to Purchase becomes binding.
A business broker, hired by the buyer, may offer a standardized or ready-made form called the Brokers Proposal or Offer to Purchase Form that covers most of the common details in an offer to buy a business. Nazarian warns that the buyer should sign prepared forms after a lawyer is consulted, never before, or simply use such forms as a draft or guide to craft an offer.
The buyer will have to decide how to present the offer. But once the seller receives the offer, the transaction speeds up and becomes more productive.
The buyer will need a lawyer and an accountant or financial adviser from the moment the offer is drafted to the day the deal closes. Consulting these professionals will cost money, but it is important to understand the details and avoid potential liabilities. If the due diligence process reveals no negative surprises that cause the buyer to back out of the deal, the formal and final purchase-and-sale contract, which is legally binding, is signed.
Make an offer today. You could wake up one day as the proud owner of a great business.
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