This is Part 1 of our “How To Buy A Small Business” Series. You can read the rest of the Series HERE.
Making an offer to purchase a business is the first step in what will hopefully be an exciting move to become a business owner. Making the right offer, covering the key points, can help ensure a smooth purchase negotiation and closing of the deal.
When making an offer for a business it is easy to become fixated on the price that you want to pay, and when the purchase will close; it can be easy to assume that you will work out all other details later. However, there are other factors to consider which may be more important to the deal and which should be addressed right from the start.
At Momentum Law we know that making an offer to purchase a business is a lot like offering to buy a car from someone: Yes, the price, the model, and the delivery date are important when buying a car, but you also need to determine the condition and features in order ensure that the vehicle meets your needs. $5,000 for a “like new” sedan delivered next week sounds great, but that deal might not seem like such a deal when the car arrives and you realize that it has 300,000 kilometers on the odometer, the car was involved in an accident last month, and the owner swapped the interior lining for fuzzy green shag.
The key points should all be addressed in your offer and not left to future negotiation: once an Offer is accepted by a seller, any point which the purchaser may want to amend will be harder to negotiate and often lead to compromise on other points.
The key points to address in your offer to purchase:
1) Assets or Shares? Are you purchasing the business assets, or all of the shares of the corporation which owns the business? This may seem like a small technical point, but the consequences are fundamental to the purchase. Generally speaking, purchasing shares is likely to favour the seller, but means that the purchaser will be purchasing all of the existing liabilities of the business as well as the assets – those both known and unknown. While a share purchase is a fine format for the transaction, a purchaser should understand the benefit it will likely give the seller, and negotiate with that knowledge. It will also mean aggressively protecting against liabilities. If the purchase is an asset purchase, then identifying the assets accurately is key.
2) Price and Payment? The price being paid for the business is of course the main focus of negotiations and should consider the point above in terms of shares vs. assets. Equally important is how and when that price will be paid. Will a deposit be made (and is it fully refundable?); will the price be paid over several installment payments; will the price be adjustable (discussed below)? Having experienced advice at the Offer stage can provide flexibility for you as a purchaser in terms of payments.
3) Adjustments? A key point which can be overlooked at the Offer stage is whether the purchase price will be adjusted for any factors. A common adjustment will be for inventory: the price will be set based on a certain valuation of the inventory – if the actual inventory is different at closing, the purchase price will be adjusted up or down according to an agreed formula. An agreement on how to value inventory is also key. If purchasing shares of a company, there will often be a “working capital adjustment” which takes into account the value of cash in the company, accounts receivable and accounts payable. Other adjustments could include adjustments over time for certain financial variables in the business after the purchase is closed.
4) Conditions? Just like buying a house, an Offer is almost always conditional upon certain factors. The most common factors will be the accounting and legal review. Again, just like a house, if you are planning to get financing to purchase the business, successful financing will also be a factor to include. The main negotiation on these points will be how long the condition lasts: the seller will want certainty on the deal proceeding, you as the purchaser will want the longest period of time to look after these details. If financing is coming from a bank, it will likely take at least 2-3 weeks to get approved, so this should be planned for. Another common condition will be the assignment of the existing Lease, or a new lease (if the business is in leased property). Depending on the property owner, this can be completed quickly, or it can take a month or more.
5) Debts of the Business? Whether an asset or share sale, the purchaser will want to ensure that any debts or the company are paid off before the transaction closes. Sometimes, this is done on the day of closing, with some of the sale proceeds. If the business has equipment which is leased or borrowed against, you might be willing to take on those obligations, but that should be clearly negotiated.
6) Employees: If the business has employees, it should be negotiated up front whether you as the purchaser will be taking on all the existing employees and the liabilities associated with them. This is an area to try to aggressively limit your exposure as a purchaser.
7) Non-Competition etc: In almost all business purchase circumstances, the purchaser should negotiate an agreement from the seller and any key shareholders to not set up a competing business for a period of time and to not solicit customers or clients. In many purchases, the seller agrees to stay on and transition the business for a period of time as well. The details of that agreement are key to set out in the Offer.
There can be other key factors to include which are specific to a particular business or industry.
The punchline is: making an offer to purchase a business is something which you should undertake with experienced advisors. Business brokers can provide very valuable advice, but they are almost always working for the seller of the business and have no obligation to protect your interest or ensure that you receive the best deal (they are doing that for the seller). Get a legal advisor involved at this early stage of the purchase and it will almost always help the full purchase process go more smoothly.
HOW MOMENTUM CAN HELP: Get in touch today for a FREE CONSULTATION on your purchase. Our experienced team can help you navigate the entire business purchase process from start to finish. We offer flat rates for a small business purchase, which allows you to budget this cost with no surprises. We provide business transition advice and help connect you with supporting services to start your new business with confidence. Already submitted an offer to purchase and just need help completing the purchase? That is fine as well – we can help you negotiate any of the missing pieces and close the transaction smoothly.