How to Make an Offer When Buying a Business
You have been looking for the ideal business to get into for a while now, you have searched around, done your due diligence, narrowed your choices, and now you have found a business that you are ready to make an offer on. At this point, you might be wondering how to go about making your offer.
The first thing that needs to be noted is that every situation is different, and there is no “one-size-fits-all” way to approach the offer and subsequent negotiations. This is one of the major reasons why it pays to work with a reputable business broker. Business brokers are professional intermediaries who match buyers and sellers and work to put together a win-win deal. Their experience in the industry is invaluable when dealing with the purchase of a business, how to structure the offer, and other important aspects of the transaction.
Making Your Offer to Purchase a Business: There is a lot that goes into making an offer on a business for sale. Here are some important things to keep in mind:
Do Not Be Afraid to Make the Offer: This might sound simplistic, but it is worth mentioning. When the time comes that you are ready to make an offer, do not be afraid to dip your toe in the water. Some people procrastinate and take far too long to present that first offer, because they are trying to come up with the “perfect” offer. The danger in this approach is that someone else will swoop in and purchase the business before you have a chance to even negotiate with the seller.
Essentially what we are saying is if you have decided that you want to own this business, then make opening offer. Maybe the offer will be too low, but that is okay. That is what counteroffers and negotiations are for. Maybe the seller will not like your proposed terms and conditions; but again, they can always come back with a counteroffer. By making that first offer, you will have a better idea of where the seller is at and what will be needed to make the deal.
Never Start Out with Your “Best Offer”: Another fundamental rule of negotiations is to never lay all your cards on the table right away. You should never start out with a full price offer or even the best offer you are willing to make for a couple of reasons. First, you do not know what kind of a deal the seller is willing to accept, and you may find out that they are willing to go down more than you would have thought.
Secondly, if you present your best offer right away, you leave no wiggle room for negotiations. Part of the psychology in this type of transaction is that everyone wants to feel like they got something they wanted. So, if you give a lower offer then agree to come up toward the seller’s price, they will walk away thinking they got a pretty good deal, even though you might have been willing to pay that price from the start.
Consider How Much Cashflow You Want from the Business: When you put together your offer, you will need to think about how much you can afford to finance and still generate enough income for the standard of living you want. Hopefully, you have a good amount of capital to put down, which will mean not having to finance as much and a lower loan payment. Make sure your offer will support your lifestyle and not leave you cash strapped when you take over your new business.
Decide on a Letter of Intent (LOI) or Full Purchase Agreement: You need to consider whether to present a letter of intent (LOI) or a full purchase agreement. A purchase agreement is more detailed and may be an indication that you are more serious about buying the business, but it can also cause buyers and sellers to get bogged down in details that are not really all that important in the grand scheme of things. An LOI, on the other hand, lays out an offer with more generalized terms, and it is often seen as a good first step toward putting together a full purchase agreement.
Do Not Worry About “Other Offers” That are Out There: You might hear that there are other offers for the business, and you may feel some subtle pressure to offer more than you are comfortable with because of this. There may or may not be other offers, and in a seller’s market like the one we are in now, there are likely to be some. Regardless, do not let this factor cause you to overextend yourself and make an offer that you will regret later.
Keep Your Deal Breakers to a Minimum: On the flip side to the previous point, a seller’s market also means that you as the buyer may need to show a little more flexibility and creativity to make the deal. Be careful about setting out too many “deal breakers” that you are not willing to budge on. There are always some lines you will not be willing to cross, and that is fine. But just be sure that you stick to these lines once you draw them; otherwise, you may lose a lot of credibility and leverage during negotiations.
Be Patient and Do Not Get Overly Anxious After Making the Offer: Making an offer on a business is an exciting step, but do not let this excitement get the best of you. Once you present the offer, the ball is in the seller’s court. While you are waiting to hear back, avoid any follow-up communications. A qualified business broker can facilitate communications for you. If the seller communicates with you to clarify something, that is fine. But the point here is to not come across as overly enthusiastic and/or desperate to make a deal. Be patient and wait for a response from the seller, then act accordingly.