Making An Offer To Buy A Business – 6 Key Considerations

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There is a lot to keep in mind when making an offer on a business for sale. It can be a scary thought for first-time buyers. 

Before we get into some of the elements to consider, the one thing you absolutely must train yourself to do is to make offers. That is what shifts the whole business buying process into overdrive.

It is the only certain way to know exactly what the seller is thinking, what their “hot buttons” perhaps, and where they are willing to disclose.

It is also an exciting time and a fantastic learning experience if you are new to this strategy.

It’s Hard To Retract The Written Word

It is always preferable to have as many calls/meetings as possible with the seller before an offer. 

You need to get a very good sense of the business, how it works, its challenges, the seller’s role, why they are selling, and if there are any obvious red flags such as customer concentration. 

The goal is to get to know them/the business, address as many questions as possible, and understand their valuation rationale and deal terms so that you do not go into the offer blindly or waste timetabling offers on a business that does not make sense to purchase.

Additionally, there are some points where you may want to take the seller’s temperature and gauge their reaction and any negation before drafting language that can turn the deal south or may be interpreted incorrectly.

The hard items are better addressed orally since it is difficult to retract what has been documented if, for example, the seller does not understand the language, or disagrees strongly. 

A written offer cannot replace face-to-face discussions.

Once a written offer is presented, and goodness knows many attorneys can make a complete mess out of a simple point, you want to avoid having to undo what the attorney created or anything sensitive they added that you did not discuss to some extent with the seller. 

No matter how new you may be to this process, make sure you understand every point that the attorney has drafted so that you can explain it. 

The reason is, that it is far better for you to arrange directly with the seller and/or their intermediary than through attorneys at least initially. 

Lawyers have their roles, but early in the process, you should establish an amicable connection with the other side.

It’s YOUR Offer

In most deals, the buyer takes a vast amount of the risk. 

It is that simple. 

Given that, you can ask for anything you want. 

It is your money, your future, and your risk. Whatever you need to feel confident in the offer and terms that will allow you to close the deal, then include them. 

The seller may not share the same view but that is their choice.

For example, if you calculate a valuation that is far below what they are asking, but your methodology is sound, then present it. 

Do not worry about insulting them – go ahead; insult them. 

Sometimes sellers need a good blast of reality oxygen.

Letter of Intent (LOI) Or Full Purchase Agreement

In smaller deals, the LOI step may be bypassed in favor of a full-blown Definitive Purchase Agreement (DPA) and that strategy has its place. However, in larger deals, an LOI or even an IOI (Indication of Interest – wow the fancy finance people sure know how to come up with wild acronyms) may be the first step.

We will focus on lower to mid-level deals and why an LOI is an effective tool in all but the most simple and smallest dealings. 

An LOI is an excellent vehicle to get the dialogue going and manage key issues while avoiding getting bogged down in the minutia ingrained with the more comprehensive DPA which can easily cause a deal to grind to a halt prematurely. The LOI spells out valuation, terms, financing, what is expected from the owner post-sale, the overview of the due diligence process, an exclusivity period for the buyers, and a target closing date.

It is also a great tool to lock up a business in a non-binding format, so it is off-limits to other buyer prospects. Before a buyer spends a lot of money on attorney fees, the LOI can serve to indicate the key unrestricted terms and allow them sufficient time to underwrite the deal while working on a Definitive Purchase Agreement.

Forget The “We Have Other Offers” Tactic

Good companies go under contract quickly. 

That is why you want to do your preliminary research efficiently. Nevertheless, do not let the possibility of a competing offer cloud your judgment. Intermediaries commonly use the age-old tactic of telling buyers there are other offers to accelerate getting their offer. While it may be true, forget about it. That tactic is the brokerage version of the car salesman telling you “I’ll speak to my manager and see what I can do”.

If a seller/intermediary gets aggressive with this strategy, tell them they may want to go ahead with the other offer, and if it doesn’t work out let you know. You will likely see how quickly they will retreat. If they don’t, then you know there may be truth to their comments, and you can then decide whether or not to expedite your offer.

Hurry Up and Wait

Once you determine that a company is of interest to you and you want to make an offer; get it done fast. Not recklessly, but quickly. 

Work with your team to get the key points into place and submit the offer with a short, but reasonable expiration (i.e. 5 working days). 

Then…wait. Do nothing. Zero. No calls to the other side…nothing.

If they contact you for clarification of any points or to respond before the great deadline. But if they do not – you do nothing until the expiration. The last thing a buyer wants to do is to come across as over-excited. 

So, work quickly to get your offer submitted, then chill out until the other side responds.

Think Before You Set “Deal Breakers”

As someone who has been involved in all facets of the M & A world – as a buyer, seller, investment banker/broker, I cannot even tell you how many times when one party has said “that’s a deal-breaker for me”, they end up changing their mind. By doing so, they lose all credibility and negotiating leverage.

If something truly is a deal-breaker and a line in the sand for you, that is fine, but stick to it. Better yet, try to avoid deal breakers. Be a deal maker. Be open-minded. Find solutions. There is always another way. Be creative. Before you take a tough stance, take an open-minded one. Be reasonable. 

Ego usually gets in the way of negotiations when one side focuses more on winning the point rather than comprehending it or exploring other options. 

Besides, if you can budge a bit on an item that you have made clear is critical for you, then you can leverage that to get a significant concession in return.

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