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.
You can analyze and research a business to perpetuity, but the fact remains there is only one way to categorically determine what a seller is really thinking – you have to make an offer!
And, it is very important that you get into the habit of making them.
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.
- An offer immediately raises your stature in the eyes on the other side of the deal. It doesn’t matter whether it is accepted, countered, or tossed into the garbage.
When you submit an offer, you are perceived as being more serious that ninety percent of the others who have inquired about the business.
- It energizes you. An offer forces you to move the deal along and to properly engage the seller.
- Most importantly,
tabling an offer is the single most effective way to get the seller to play their hand.
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.
There is a lot involved in a business purchase, and getting the seller to play their second hand is what you need to figure out your next steps.
Any seller can hide behind a listing. They may have completely unrealistic expectations on price and terms. Your offer is the only way to get them back to reality.
(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,
you can move a few paragraphs around, or add language for further clarity or protection to meet legal standards, so long as the substance of and material terms in the agreement remain unchanged.
And so if any party tries to force you into any offer saying you have time afterwards to have your attorney review it, then yes, it may be the case, but that doesn’t mean you can change what you have signed.)
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
you always want to have your attorney’s and accountant’s input, but that aside, the majority of them contain consistent language and only the specific business issues need to be articulated.
Getting into this habit will allow you to react immediately when the right business surfaces. Putting in an offer does not mean you’re buying the business but it clearly indicates to everyone, and especially yourself, you are serious about buying a business.
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