How to Make an Offer on a Business

Reaching this stage of the acquisition process is reassuring. Commend yourself because you’ve made admirable progress, and your dedication and diligence aren’t unnoticed. Many interested buyers don’t make it to this pinnacle stage of making an offer, but you’ve contested any frustration, reluctance and uncertainty that the business buying process has lent you—it’s time to keep working forward. Drafting an offer is the first step to making an acquisition dream a reality.

Here’s What You Need to Know About Making an Offer

By shaping an offer on a pre-existing business, you place your intentions as a buyer at centre stage. An offer collectively demonstrates your motivation to buy, your understanding of the business, the assets that are valuable to you and your aspirations for the future of the business. With that, a seller’s response to your initial offer shows you their true willingness to sell, highlighting their silent stipulations and thoughts about the acquisition.

Like many other phases of the business buying process, the offering stage can be a cyclical time loop—the first offer may not be your last.

“Rarely is a first offer acceptable. Be open-minded to the seller’s concerns and do not be shy to put forward yours. The goal is not to beat the other side, though, but to arrive at an acceptable set of terms and conditions that will work for you and the seller.” — Greg Kells Sunbelt Business Brokers

When you enter into an offer on a pre-existing business, you’re making a commitment to move forward with acquisition. This doesn’t mean that an offer solidifies a deal or ties you down to this particular business, but it does mean that you should only enter into an offer agreement with one business at a time. Never offer on multiple businesses at once.

Once Again, Bring Your Advisors to The Table

Offering on a business is a crucial part of the acquisition process that leads to the eventual closing of a deal. A thorough offer, sets essential factors in place. It’s important to create a comprehensive offer so you identify the factors that will ultimately guide negotiations of your deal and influence the future purchase agreement and acquisition.

Hire a transactional lawyer.

Offers are not legally binding; however, most formal offers include legal provisions and clauses (i.e confidentiality agreements, non-compete clauses etc.)

Hiring a lawyer, who has experience drafting acquisition offers, to either write your offer with you, or look over your offer before it’s signed, ensures that details are not left out and that conditions are properly accounted for. Hiring a lawyer from the beginning is key—it’s less costly for a lawyer to draft or review an offer than it is for them to fix issues with an offer or renegotiate provisions later.

Drafting the Offer

Each written offer has 2 essential components.

Non Disclosure Agreement - The confidentiality agreement is typically embedded in the offer letter. It protects all parties involved in the offer.

Letter of Intent (LOI) - The written offer.

According to Richard Parker from Forbes magazine,

“The LOI spells out valuation, terms, financing, what is expected from the owners 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.”

Clauses in LOIs can detail the following:

Transaction details
People involved in the transaction
Price range offer
Period of exclusivity or no shop clause (For a period of time, the seller agrees not to entertain other offers unless disclosing details to the buyer.)
Distribution of the transaction costs
Withdrawal stipulations (Before signing a purchase agreement, the buyer may withdraw from the transaction if it proves to be monetarily unfit.)
Conditions for transaction & deal closing

Keep in mind…

The portion of an LOI that is typically overlooked is the inclusion of an implied schedule. Blueprinting important dates within the LOI helps to define the further stages of acquisition. Without a schedule in place, buyers can remain stagnant with a letter of intent for quite some time. The schedule may outline such information:

Execute LOI on this date
Due diligence period will last until this date
Conditions will be lifted on this date
Purchase Agreement from lawyers should begin on this date
Target closing date by this time

Outlining dates also holds each party involved in the LOI (there can be as little as 7 people involved in one offer: the buyer, the seller, the buyer’s lawyer, the seller’s lawyer, the buyer’s accountant, the seller’s accountant and the lender) accountable to complete the elements of the LOI in a timely manner.

How to Write a Letter of Intent (LOI)

Here’s a simplified checklist that identifies the minimum elements that an LOI should include:

LOI ChecklistA description of what is being purchased (assets that the owner is selling) and what is not (assets that the owner is not selling)

-The price of acquisition
-The deal structure (e.g. asset acquisition, stock purchase or merger)
-The seller(s) name(s) and address(es)
-The buyer(s) name(s) and address(es)
-Confidentiality agreement
-A statement that the agreement is non-binding subject to (a) the buyer being satisfied with their review of the business(b) the buyer having secured the financing necessary to close the deal; and permission for the buyer or the buyer’s lawyer to contact the seller’s lawyer, accountant, banker, etc., to carry out due diligence on the business
-The date of the offer
-The date on which the offer expires
-The proposed closing date of the deal
-The terms of the acquisition This should include the form of consideration (for example, stock, cash or debt), vendor financing (with details of interest rate, term, amortization, secured or unsecured, contingencies), and exactly what is being purchased.
-The deposit amount, conditions regarding escrow and treatment of deposit
-Period of exclusivity or no shop clause (e.g. the seller must not enter into negotiations with any other party and will take the business off the market for a designated period of time)
-Details about a non-compete clause (e.g. the seller conditionally agrees not to work in the business industry subsequent to acquisition for an extended period of time as to prevent competition for the new owner.)

Outlined by co-founder of Village Wellth, Liz McRae. McRae consulted Douglas Gray’s and Norman Friend’s book Be Your Own Boss: The Insider’s Guide to Buying a Small Business or Franchise in Canada to create the checklist.

If you know for certain that you want to present a seller with a letter of intent, then don’t hesitate to. As Richard Parker says “good businesses go under contract quickly.” It’s crucial to act promptly, but mindfully. This “is why you want to do your preliminary research in an efficient manner.”

Village Wellth provides users with a directory of expert advisors—those who are equipped at reviewing, drafting and finalizing LOI documents and more. Village Wellth strives to connect buyers directly to the advisors who have the mastery to craft essential contracts and documents required throughout the process of buying a business. Access to qualified advisors will enable the success of your acquisition.