You have gone through the process of selecting a business and have met with the owner. After reviewing the information you have obtained from the owner through your business broker, you are ready to make an offer. This article will prepare you for some of the items you will want to include in your offer.
You can ask your attorney to write a Letter of Intent or an Offer to Purchase or you can ask your business broker to write the Offer for you. Either way is acceptable, and it is your decision. There is no charge if the business broker writes it, which will be a form prepared by an attorney. At this point, you should have an attorney and accountant to review documents when needed.
The first decision you will make is how much to give as an earnest money deposit. This will be deposited into an escrow account and will not be given to the seller until closing, where it will be part of the down payment. Three to five percent of the offer would show the seller you are seriously interested, and there are many statements in an offer that protect you from losing that earnest money.
Next are the terms; how much you are offering for a purchase price and how it will be paid. This will include cash and information about a secured promissory note to the seller, if required. If you are getting financing from a lending institution, you will specify the length of time you will have to secure a financing commitment. This is important to you and the seller, as the offer will be terminated and you will be refunded your deposit if the commitment is not received by that date.
The closing date, the escrow attorney, and who will pay the closing costs will be included in the offer. The business broker can provide a list of escrow attorneys for you. It is usually less expensive for you to use an escrow attorney to prepare the closing documents and do the closing, with your attorney and the seller’s attorney simply reviewing the documents.
The seller will provide a normal level of inventory, valued at the seller’s cost, in the marketing packet of information provided to you. It is important in your offer to state that value to be included in the purchase price and that the actual inventory will be adjusted when it is counted and priced just before closing.
The length of the due diligence period should be specified, with a clause stating the offer will be terminated and the purchaser’s deposit refunded if all contingencies are not removed in writing by the end of the examination period. This is the time to do a complete examination of the furniture, fixtures, equipment, books, records, workers’ compensation history, contracts, and other information deemed pertinent to the seller’s business.
You will include the length of time you wish to have the seller train you after closing, with no additional charge. This will vary according to the type of business. All training should be done after closing and never before. Always specify a period of time and a defined area in which the seller will not compete, as you don’t want the owner to start a competing business near you and take your customers away. You will also state that the seller will assign all contracts benefiting you that exist at the time of closing.
If the seller leases the premises where the business is conducted, you will definitely want a clause that states you must have a valid lease assignment, sublease or new lease before closing. It is important to specify the length of the lease and the amount of monthly rent and that your offer will be terminated and your deposit refunded if you reject the lease or if the landlord is unable to deliver a valid lease assignment, sublease or new lease.
While this does not include everything, I feel it important to mention three more items. The seller must agree to deliver all lists of clients and vendors to you at the time of closing. Another is the company name. If the seller operates under the name of the corporation, the name of the corporation must be changed or the corporation dissolved, as you will want to operate under the name currently used by the business. Lastly, it is good to include the allocations to be used in the purchase price so you can agree before closing documents are prepared. Four items that should be included are:
• Furniture, Fixtures & Equipment
• Inventory
• Non-compete Agreement
• Goodwill, Client Lists, etc.
The total of these will equal the amount of your offer to purchase.
