Crafting a Strong Business Purchase Offer: A Buyer’s Guide

When buying a business, your offer is a critical component that can set the stage for a successful acquisition. A well-prepared offer not only shows your seriousness but also outlines key terms and details that will guide the transaction. At EDGE Business Advisors, we help buyers navigate this process to ensure their offer is both competitive and realistic.

Start with a Letter of Intent (LOI)

Before diving into a binding offer, it's wise to initiate the process with a Letter of Intent (LOI). The LOI is a non-binding document that outlines your interest in purchasing the business and sets the groundwork for early conversations with the seller or the seller’s advisor. It’s an essential tool for both parties to begin negotiations, understand each other's expectations, and build a foundation for trust. While the LOI is not legally binding, it serves as a critical first step toward formalizing the purchase agreement.

MAKE OFFICIAL BINDING OFFER WITH A "Business Sale Offer and Acceptance Agreement"

Once initial discussions and negotiations have taken place, you'll likely need to submit a formal offer, known as a "Business Sale Offer and Acceptance Agreement". This is a binding offer that, once accepted by the seller, grants you exclusive negotiation rights. When submitting this formal agreement, it’s customary to include an escrow deposit, usually between 2-5% of the total purchase price, as a show of good faith.

Now, let’s break down what you should consider in your offer.

Key Components of a Business Purchase Offer

• Total Purchase Price
• Cash Amount from Buyer(s)
• Escrow to be submitted upon acceptance
• Amount to be Bank Financed
• Amount Requested in Seller Financing & Terms
• Contingency Payments
• Requested Non-Compete
• Financing and Lease Contingencies
• Due Diligence Period
• Proposed Closing Date
• Asset Purchase or Stock Purchase

A Closer Look at Each Component

Total Purchase Price: While you want to get a good deal, a lowball offer might turn the seller off. Make sure your offer reflects a fair market value based on comparable sales and the financial health of the business.

Cash Amount from Buyer(s): The more cash you can put up front, the better. This demonstrates your ability to finance the deal, which can make your offer more attractive to the seller.

Bank Financing: Ensure that the terms you’re suggesting are realistic. Work with a lender ahead of time to confirm that the loan you need is likely to be approved based on your financial profile and the business's performance.

Seller Financing: While you may want the seller to finance a big portion of the deal, remember that sellers often prefer all-cash offers. Keep your seller-financed portion reasonable—typically no more than 10-20%—and ensure that the terms are fair.

Contingency Payments: Including a performance-based bonus can help address seller concerns, particularly if there are uncertainties about customer retention or business continuity after the sale.

Non-Compete Agreements: A non-compete ensures that the seller won’t set up shop in direct competition with you after the sale. Be clear about the time frame and geographic scope of the agreement.

Financing and Lease Contingencies: Having these contingencies allows you to back out if financing falls through or if you cannot secure a lease agreement. This protects your initial deposit and avoids locking you into a deal under unfavorable terms.

Due Diligence Period: Don’t rush this part of the process. Use this time to thoroughly review all aspects of the business to avoid surprises post-purchase.

Proposed Closing Date: If bank financing is involved, give yourself at least 90 days to close. This timeline allows for processing and approval, but always confirm with your lender on expected timeframes.

Asset vs. Stock Purchase: An asset purchase limits your exposure to the seller’s liabilities, making it the safer option for most small business acquisitions. However, stock purchases may offer tax advantages in certain cases, so consult your attorney.

Writing a strong offer to purchase a business requires careful consideration of all key elements, from the purchase price to financing terms, contingencies, and closing timelines. A well-crafted offer not only demonstrates your seriousness as a buyer but also positions you for a successful transaction. By understanding the critical components and ensuring your offer is competitive and realistic, you increase your chances of securing the business you want. If you’re navigating the process of buying a business, EDGE Business Advisors is here to provide expert guidance and support, ensuring your offer aligns with your goals and leads to a successful acquisition.