Your first offer for a company serves as a starting point for future negotiations. It is important to make a strategic first offer so that you are in a position to secure a fair deal to acquire the company. In this review, we discuss how to make a good first offer to buy a business.
Before Your Offer: Here is What You Should Know
You have likely already contacted the seller, signed a non-disclosure agreement (NDA), and viewed the seller’s sales memorandum by the time you make an offer. Before you make an offer, consider the following:
- Consider the amount of cash you have (and will need) – This is an important starting point before you provide an offer; you do not want to have to withdraw or change your offer later due to a lack of financial resources. You will need to know how much you can spend on a down payment without causing a major disturbance to your financial security or lifestyle.
- Consider your financing options – If you cannot realistically afford to purchase the company entirely at closing, then you will need either seller financing or financing from a third party.
- Consider how much you are willing to pay (and leave yourself some wiggle room) – You will then need to establish how much you are willing to pay for the company. In other words, how much do you think the company is worth? Of course, competing bids may influence this figure as well. Your offer may not be the entire amount you are willing to pay, and it is generally a good idea to provide yourself with some wiggle room to improve the offer during negotiations.
- Consider the deposit – Lastly, you should consider the deposit for the offer. This may be required to demonstrate proof that you are serious about buying the company. Your deposit may not be returned if you cancel the sale before settlement (if your offer is accepted).
How to Create an Offer to Buy a Business
You should put your formal offer in writing. This allows you to control the language of the offer and ensure you communicate what it entails in a clear and direct manner. The offer is usually submitted through the seller’s broker. As mentioned, a good-faith, refundable deposit is often included. Below are the steps that are typically involved in the offer process.
The Price and Terms of The Offer
Your written offers should include the price you are willing to pay for the company (the purchase price). You should stipulate clearly that this offer price is subject to due diligence; it is not a binding offer. Also, you should detail the terms of the payment. For instance, if you are financing, then you should clearly state the down payment amount and how long it will take you to pay off the remainder of the purchase amount through financing. It should also include the interest rate as well. More specifically, you should highlight the proposed payment frequency (monthly, quarterly, etc.) and the amount of each payment.
The Seller’s Responsibilities After Closing
You can also establish the seller’s responsibilities after closing. The extent to which you require their involvement likely depends on your experience within the industry. For example, if you are purchasing a manufacturing company but do not have much direct experience with the manufacturing processes, then you will likely need the current owner to stay on staff for a set amount of time and/or provide consulting services throughout the transition. Of course, if you have experience, then you may not need as much assistance with the transition.
However, in many cases, the more involvement you get from an owner the smoother the transition is. Keep in mind, many sellers are hesitant to commit to a large time investment after they sell the company, so you may face some pushback on your proposed terms if you ask for the seller to remain employed with the company.
Closing Date and When Payments Begin
You may also choose to include a closing date. This date may be subject to change based on how long negotiation and due diligence processes take. You can also provide an offer for when payments would begin. Specifically, this indicates how many days after closing payments begin.
Tips to Remember When You Make an Offer
You should ensure that the offer you submit is non-binding and conditional and provide a list of contingencies that are necessary to protect yourself in case you need to withdraw the offer.
Ensure The Offer is Non-Binding and Conditional
You want your offer to be non-binding. This means that you are not obligated to purchase the company and it provides you the opportunity to withdraw your offer if you change your mind and/or the seller does not satisfy all contingencies (see below). Primarily, an offer may be withdrawn if the company’s financial information is not accurate or where it would be. This is especially the case if financial information is not fully provided until the due diligence stage.
Consider All Contingencies You Should Include
You may need to establish certain contingencies for the offer as well. These may be related to financial considerations (financing, etc.) or they may be non-financial considerations such as non-compete clauses, transition assistance, etc. Specifically, here are some common contingencies:
- The financing the buyer needs can be obtained (either through seller financing or a financial institution)
- The lease terms and conditions are satisfactory for the buyer
- The equipment (and other forms of capital) are in acceptable working order
- Both sides can agree on a fair non-compete agreement for the seller
- Both sides agree to terms related to the transition of the company and training
Sigma Mergers and Acquisitions Helps Buyers Create Offers
You receive assistance throughout the buying process when you choose Sigma Mergers and Acquisitions. We help you find the right company, create your first offer, negotiate, conduct due diligence, and close the sale. To learn more and get started, contact us today.