What to Expect in an Offer to Purchase Your Small Business

Selling your small business is a significant step, and when you receive an offer, it's crucial to understand what each component means and how it affects the overall deal. As a seller, knowing what to expect in an offer will help you evaluate whether it aligns with your goals. Here's a breakdown of the key elements included in most offers to purchase a small business, along with EDGE for each.

Key Components of an Offer

Total Purchase Price

The total purchase price is the full amount the buyer is offering to pay for your business. This figure includes any combination of cash, bank financing, and seller financing. Make sure the price reflects your business's market value, considering factors such as cash flow, assets, and goodwill.

EDGE: Look at all the components of the purchase price carefully. A higher total purchase price may seem appealing, but sometimes the terms of a lower purchase price—such as more cash upfront or better financing conditions—could result in a better deal for you.

Cash Amount from Buyer(s)

The portion of the purchase price that the buyer is contributing in cash is a critical indicator of the buyer’s commitment. A higher cash contribution from the buyer shows financial strength and reduces the overall risk to you. Sellers typically prefer deals with substantial upfront cash payments to ensure they are paid promptly without heavy reliance on financing.

EDGE: A larger cash contribution from the buyer reduces risk, giving you more confidence that the deal will close successfully.

Bank Financing & Financing Contingencies

Many buyers will use bank financing to cover part of the purchase price. When an offer includes bank financing, it usually comes with a financing contingency, meaning the sale is dependent on the buyer securing a loan. This process can take 2-4 months, and you should expect the potential closing date to reflect this timeframe. If the financing falls through, the buyer can back out of the deal without penalty, which introduces significant uncertainty and potential delay.

EDGE: Prequalify buyers who request bank financing. Check their credit score, personal financial statements, and require a letter from the bank to ensure they are likely to get approved. This helps avoid being tied up with the wrong buyer for months, as bank financing can take 2-4 months to secure.

Seller Financing

In some cases, the buyer may ask you to finance a portion of the sale yourself, known as seller financing. This means that you’ll receive part of the payment over time, typically with interest. Seller financing can be appealing to buyers and may come with tax benefits for you as the seller, spreading the income over time. However, this also introduces risks. You should have a proper loan agreement and security agreement in place to protect yourself. If the buyer defaults on payments, these agreements allow you to take back the business.

EDGE: With current interest rates and lending conditions, you can expect many offers to come with some seller financing. Typically, I’ve seen seller financing in the 10-20% range, but this depends on the company’s financial performance and how much the bank is willing to lend.

Contingency Payments

Contingency payments are additional amounts the buyer agrees to pay based on specific conditions being met. For example, the buyer might agree to a bonus payment if certain key customers remain with the business after the sale. These payments offer some security but can add complexity to the deal, so be sure the conditions are achievable and well-defined.

EDGE: Make sure the conditions for any future payments are realistic and clearly documented to avoid any confusion or disputes later.

Non-Compete Agreement

Buyers will often request a non-compete agreement to prevent you from starting a new business that competes with the one you just sold. These agreements are usually time-bound, lasting 12-24 months, and geographically limited. Make sure the terms are reasonable and won’t overly restrict your future opportunities.

EDGE: Ensure the non-compete’s time frame and geographic scope are reasonable and won’t limit your ability to pursue future ventures.

Lease Contingencies

Lease contingencies are one of the most important topics in the sale of a small business and a common deal killer. If your business operates from a leased space, the buyer will likely include a lease contingency. This means the sale depends on the landlord approving a lease assignment or a new lease agreement with the buyer. The landlord has a lot of power in this situation, and in many cases, they can cause significant delays or even take advantage of the situation.

EDGE: Be proactive in communicating with your landlord early to understand their requirements for lease assignment or renewal. Be prepared for potential delays, as lease contingencies are often a top cause of deal collapse.

Due Diligence Period

During the due diligence period, the buyer will thoroughly review your business’s financials, legal standing, and operations to confirm that everything is in order. This typically lasts 10-14 days for smaller businesses, though it may be longer for more complex deals. Be prepared to provide accurate and organized documentation during this time, as any issues uncovered could lead to further negotiations or adjustments to the offer.

EDGE: Be organized and transparent during the due diligence process to avoid unnecessary delays and ensure a smooth review.

Proposed Closing Date

The buyer will propose a closing date, which will vary based on how the deal is financed. Cash deals can close relatively quickly, often within a month, while bank-financed deals may take 3-4 months to finalize. Ensure that the timeline works for you and aligns with any post-sale plans you may have.

EDGE: Make sure the proposed closing date aligns with your timeline and accounts for any time needed for financing and due diligence.

Asset Purchase vs. Stock Purchase

Most small business sales are structured as asset purchases, where the buyer acquires the assets of the business rather than its stock. This limits the buyer's exposure to liabilities associated with the business. However, in some cases, a stock purchase may be preferred, particularly if the business operates in certain industries or the buyer wishes to acquire the entire legal entity. Be sure to consult your attorney about which option is best for your specific sale.

EDGE: Consult with your attorney and advisor to understand the tax and liability implications of asset vs. stock purchases. Choose the structure that works best for your goals.

Selling your small business is a big decision, and reviewing offers with care is critical to ensuring you get the best deal possible. By understanding the key components of an offer and what to expect, you can confidently navigate the process and move toward a successful sale. At EDGE Business Advisors, we’re here to help you every step of the way, ensuring your interests are protected and your goals are achieved.