How to Make an Offer to Buy a Business
You've found the business you've been searching for, done your preliminary research, and have asked all the right questions. Now it's time to make an offer. How do you determine a fair price? Should you offer all cash? Is it appropriate to request owner financing? Do you make your offer verbally or put it in writing?
Your initial offer sets in motion the negotiation process. Ensure your initial offer is well within your financial limits, then see if the seller responds by making a counter-offer, which will indicate if a deal can be made that works for everyone.
Here are the general considerations to make as you consider your offer:
1. Consider Your First Offer the Initiation of Negotiations.
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 can raise – not just what the seller wants.
If you find a business that fits your criteria, don't be afraid to make an offer. Initially, you may feel the asking price is too high, or that the seller will not consider owner financing. Whatever the hesitation, keep in mind that the initial offer is just that, an initiation. You may be surprised at how flexible a seller can be once an offer actually hits the table.
To read about terms that will likely need to be worked out, see Negotiating Terms When Buying a Business.
2. Consider How Much Cash You'll Need Going Forward.
Your offer will center on three main points: 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 a 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 professionally. You offer a down payment that you can afford - nothing more.
3. Start at a Price that Leaves Wiggle Room.
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 determined an estimate of its value.
As a general rule, 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 agree on a price. Just be mindful of your “walk away” point so you don't overextend yourself with the purchase.
For an overview of valuation methods and insights into market trends, see our guide on how to value a business for sale.
4. Put Your Offer in Writing.
Once you know how much cash 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. If your lawyer is drafting the offer, it will be structured as a Letter of Intent (LOI), but at this point you don't have to worry too much about format. Just make sure you cover the following items:
Here's an example of what to include in your offer:
- Written offer (likely through the selling broker) with refundable good faith deposit of $1,000
- Purchase price (subject to due diligence)
- Down payment amount (cash and/or outside financing)
- Terms and conditions on the balance due (if financed by seller) over a 5-7 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” 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.
You can read more about producing a formal offer in our article, What is a Letter of Intent?
Send Your Offer
Submit your offer and prepare for the response. Typically, the seller will seek 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.
To learn about the whole process of purchasing a small business, you can download BizBuySell's free Guide to Buying a Business.