Buying a Business Begins with a Signed Offer to Purchase
Starting with a written agreement to buy a business is an obvious statement to many, but in some deals, buyers want to start another way. Sometimes, after agreeing on the basic price and terms, the buyer presents a non-binding letter of intent or suggests going directly to a purchase and sale agreement while bypassing the offer to purchase. Both of these methods are mistakes that can create risk for the buyer and seller. There are three elements to the offer to purchase that make it essential -- price and terms, the structure of the deal, and the commitment by the parties.
The first parts of a deal that are normally agreed upon are the price and terms – how much is being paid and when will it be paid. Usually, some basic idea of the financing is also included, whether it is seller or third party financing or a combination of the two. By putting these details in writing in an offer to purchase, it is less likely that there will be a disagreement about them later.
The final document that specifies all of the terms of the sale is the purchase and sale agreement, which may also be called by other names. Between the two agreements, there are normally buyer contingencies, specified in the purchase agreement, that need to be satisfied. If any buyer contingencies are not met to the buyer’s satisfaction within the deadlines established in the agreement, the buyer can terminate the deal and receive a return of the deposit. The typical contingencies are:
- Due Diligence –The process of verifying that the books and records of the business support the financial information that has previously been given to the buyer and that there are no serious problems with the business.
- Financing – The buyer is able to get a loan to buy the business on acceptable terms.
- Lease – If the business is in leased premises, the buyer is able to get a satisfactory lease.
- Other contingencies – There may be other contingencies depending on the nature of the business. One could be the transfer of a liquor license. Another could be transfer of a franchise agreement.
- Final documents – The purchase and sale agreement, a non-compete agreement, and any other necessary documents between the parties.
The final purpose of the written purchase offer is a commitment from both the buyer and the seller. A signed agreement shows more commitment to the deal than a verbal agreement and more than a non-binding letter of intent. A non-binding letter of intent does not create a binding agreement to buy the business. Since many deals don’t close because of a failure to satisfy one of the contingencies listed above, it is best to start with a strong commitment by the parties.
It is usually to both parties benefit to have the deal close as soon as possible or terminate as soon as possible if it is not going to close. A written purchase agreement, by making the terms of the purchase clear, establishing the contingencies and a deadline for their satisfaction, and showing commitment by the parties, increases the chances for a successful closing of the sale.
