Whenever somebody starts a sentence with “You won’t believe this… ” - I always reply: “I believe anything”. After nearly twenty years in the arena of buying and selling businesses, I have learned that you cannot easily predict what people are thinking or what is going to happen with the deal.
This industry does not deal with a definitive product. You are dealing with personalities, and while you can prepare yourself best by anticipating how people may react to certain deal issues, there are no absolutes. This is critically important to understand if you are buying a business.
In another post we will discuss offer types and whether it is best to use a Letter of Intent or Full Purchase Agreement (which I prefer by the way whenever possible). For now, I want to explain why it is crucial to get comfortable with making offers.
It does not matter what deal terms are listed, or where the seller or a broker may have said they are “firm”. When a buyer submits an offer, it gets the seller thinking. It provides the entire basis for a continued and meaningful dialogue.
Since you never know with absolute certainty what someone may be thinking, it stands to reason that there is no predicting how they will react. So what if your offer insults them? As long as you believe your offer is fair, and you are prepared to live by it, get it in front of them.
Regardless of the business listing terms, perhaps they are having a rotten day, and just want out of the business. Maybe the business has been on the market much longer than they anticipated, and they truly want to sell. Or maybe, they haven’t had much interest (this is pretty common today), and they just want to start negotiating with someone.
Other times, your offer may serve to let them know what the market is thinking. After all, a business is only worth what a buyer is prepared to pay and the terms under which they are ready to do so.
When it comes to the offer, as long as you are not being ridiculous, get it onto paper.
It is also important to understand that it is YOUR offer. Don’t let anyone unduly influence the terms or conditions.
It is possible that it could be rejected and that is fine. You will either get into deeper negotiations, or you’ll move on. However, if the offer is reasonable, it will produce a response from the seller. You will quickly learn whether the down payment is more important than the price, how far they move on the asking price, will they suddenly entertain a note when they said otherwise in the past. What are their expectations for due diligence. If you included an earnout, how have the countered? All these issues and more will come to light simply as a result of a buyer putting an offer in front of a seller’s nose.
(On this note, there is something you must be aware of in offer documents. You may see a “Review” clause in some Purchase Agreements that indicate you have x number of days for the offer to be reviewed by your attorney/advisors after it is executed. Almost always, these clauses do not mean that you can rescind the deal or make any significant changes.
Do not let anyone tell you otherwise unless it clearly states so. The review is almost always for allowing changes to format and language only. It is NOT for any material changes. In other words,
One of the benefits of making offers is that only the first one is difficult. Once you understand the general parameters of what should be included, you can bang them out with ease. Of course
There are some excellent resources for you to read about deal structures, offer terms and valuations at http://www.diomo.com/ask-the-expert.html and one article you really need to read regarding the importance of forgetting a seller’s asking price which you can read at: http://www.diomo.com/forget-the-asking-price.html
This article represents a fraction of what you’ll learn on this topic in the How To Buy A Good Business At A Great Price© series - the most widely used reference resource and strategy guide for buying a business. To learn more click here
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