How to Make an Offer When Purchasing a Business
You’ve found the business you’ve been searching for, done your preliminary research and have asked all the right questions. Now, you're probably wondering how you should make an offer on this business. Should you offer all cash? Is it best to request owner financing? Should you verbally make an offer or put it in writing?
The dance begins with you making a buyer/seller-friendly offer - an offer that works for you, as well as protects you. Then, see if the seller responds by making a counter offer, which will indicate if a deal can be made that works for everyone.
General Guidelines for Making an Offer on a Business:
1. Don’t Be Afraid To Make An Offer – Negotiation Plays a Big Roll.
Negotiations play a major role in buying and selling a small business. It’s a back and forth process between buyer and seller of an agreed upon price, plus a down payment and workable terms and conditions. The down payment is determined by how much the buyer has, and can put down – not just what the seller wants.
If you find a business you like, don’t be afraid to make an offer. Initially, you may feel the price is too high or that the seller will not consider owner financing. Whatever the hesitation, at the very least, you should commit to submitting a purchase offer. You may be surprised at how flexible a seller can be once an offer actually hits the table.
2. Consider How Much Cash You’ll Need Going Forward.
Your offer for purchasing a business will likely be built on three main pillars: purchase price, down payment and financing. Ideally, you’ll have enough cash to put down, support your own lifestyle and service the debt on the business - whether the payments will be to the prior owner or to the bank.
As you create your offer, consider how much cash you can give as a down payment and still have enough working capital to operate the business. Work up an offer that won’t leave you cash-strapped or stressed about cash flow either personally or business-wise. You can only offer a down payment that you can afford - nothing more.
3. Never Start Out With a Full Price Offer.
The seller will have their price, but your offer can be different. By now, you’ve taken the time to look at the business and the local market. You’ve already reviewed preliminary financial information about the business and used some valuation rules of thumb to estimate its value. At this point, you have an idea of how much you’d like to offer.
Never start out with a full price offer. You can always come up. Remember, you can also consider additional factors that can adjust your purchase price later down the line. After all, you may find more things in the due diligence period that justify a price reduction.
As a rule of thumb, don’t offer your very best or maximum offer. You want wiggle room in case the seller comes back asking for a higher price. There may be a lot of negotiating back and forth before you actually agree on a price. Just be mindful of your “walk away” point so you don’t overextend yourself with the purchase.
4. Put Your Offer in Writing.
Once you know how much money you can put down on the business, as well as what it would take to service the debt and operating capital needs, you should be prepared to put a very simple offer in writing.
- Written offer (through a broker) with refundable good faith deposit of $1,000
- Purchase price (subject to due diligence)
- Down payment (cash and/or outside financing)
- Terms and conditions on the balance due, which will be financed by seller
over a 7-10 year period at a reasonable interest rate
- Monthly payments, amount and duration
- Date first payment begins, number of days after closing
Make an offer contingent on the following:
- All financials are subject to review and approval by buyer
- The Lease terms and conditions are subject to review and approval by buyer
- All equipment is in good working order at time of closing
- All sellable inventory is at a normal level at time of closing
- Any financing needed by buyer can be obtained at acceptable terms
- Buyer and seller agree on acceptable industry non-compete agreement
- Buyer and seller agree on acceptable transition and training period for new management
There may be more intricate details of your offer that you’ll want to finalize with legal counsel, but this is a general guideline of what should be included for purchasing a business.
Finally, accompany your offer with an “earnest money” or small refundable deposit of approximately $1,000 to prove that your offer is serious. This money can be held in escrow by the business broker or an attorney (not the seller’s.) Once a contract is signed by all parties, the deposit can be increased if needed.
See How the Seller Responds
Next, submit your offer and see how the seller responds. They may want a bigger down payment or a shorter payment period. Be ready to negotiate or even close a deal. Either way, you’ve taken your first step in making an offer to purchase a business.
For more information on purchasing a small business, you can download BizBuySell’s free Guide to Buying a Small Business. Then visit BizBuySell, the Internet's largest marketplace for buying and selling a small business to find your next business venture.