"Anatomy of a Business Purchase Offer" "Step-by-Step Procedures for Preparing a Successful Business Purchase Offer" Toby Tatum, 132 pages, 2nd edition with Interactive Purchase Offer Form

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Introduction

According to various experts associated with the sale of privately owned businesses throughout the United States, there are approximately 1.2 million such enterprises for sale at any given time. It is also estimated there is somewhere in the neighborhood of twenty would-be buyers for every business for sale. This suggests there are approximately 24 million people actively looking for a business to buy.

Yet, it is also estimated that about four out of every five businesses for sale will never sell! This means something close to 99% of all the would-be business buyers will not succeed in their effort. The “business opportunity” market is probably one of the most inefficient markets there is. The sad fact is, the vast majority of both business buyers and sellers cannot seem to strike a deal.

There are a number of reasons for this situation, the principal one probably being the inability of sellers to figure out what their business is worth and price it accordingly. Most privately owned businesses on the market are notoriously overpriced. However, even in those cases where the seller’s asking price is reasonable, the manner in which businesses are being marketed is often so poorly orchestrated that buyers are either unaware these businesses are for sale or cannot make sense of the financial performance and other pertinent data presented.

Both the tasks of attempting to sell a business and of trying to buy a business are enormously difficult because the act of selling or buying a business is a very complex transaction. However, there are numerous resources available on the subjects of How to Sell a Business and How To Buy a Business such as books, seminars, journal articles and so forth as well as professional consultants and business brokers available to assist individuals in these efforts. Anyone contemplating either selling or buying a business would be well advised to avail themselves of one or more of these resources.

However, in all such how-to-sell or how-to-buy a business resources the focus is usually on the “big picture” and generally there is not enough nuts-and-bolts detail on actually making or interpreting a purchase offer once the parties get to this point in a transaction. It is my belief that many potential transactions that are right for both the seller and the buyer do not come together because the buyer just can’t figure out how to take the last big step in the process and make an offer. The purpose of this book is to provide that instruction and through this process, perhaps in some small way, pave the path for some buyers and sellers to make a deal that might not have otherwise come together.

Of course, any discussion on how to make or how to interpret a purchase offer for a business must, of necessity, overlap to some degree with the issue of how to buy or how to sell a business. For any reader who is not familiar with the business buying process, this book will be very instructive.

The principal perspective of this book is one of providing advice to would-be buyers. However, it is just as instructive for sellers as well; maybe even more so because it will allow the seller to “walk in the other person’s shoes” so to speak and perhaps for the first time, begin to appreciate all the concerns a buyer typically has about buying a business. It is important for business sellers to realize that the act of buying a business is far more difficult, more time consuming, more stressful and much more fraught with risk than that of selling a business will ever be.

Indeed, one of the central themes built into the process presented here is one of Risk Management. That is to say, an attempt to more equitably allocate the risk involved in buying a business between buyer and seller. This fact will become abundantly clear through the course of this book. For the business seller, this effort may appear as an attack on his or her integrity—nothing more than a recurring series of innuendoes about the buyer’s presumption of the seller’s innate dishonesty. For a seller to view this process in such fashion would be a mistake. Were a buyer to truly believe the seller with whom he is dealing is fundamentally a crook, it is unlikely that buyer would ever make an attempt to buy the business at all. The best perspective for both buyer and seller to assume is that this process is simply one of risk allocation and, moreover, one that will be most productive when both parties strive for reasonableness, fairness and balance throughout. By keeping this fact clearly in view at all times, there is no reason why the process cannot proceed within a congenial atmosphere void of contention, hostility and mistrust. The process is going to be difficult enough without having to deal with those problems.

It is important to point out now that this book is not intended to be a “buying-a-business-made-easy” treatise because buying a business is not easy. For anyone unfamiliar with the process—and this includes virtually every first-time buyer, it is imperative that you get some help. Hopefully, after reading this book you will better appreciate this advice. Furthermore, it is important that the help you seek comes from professionals properly qualified for this purpose. If you engage an attorney—which you should, engage one who is familiar with business purchase and sale transactions.

It should also become evident that you will need some help in determining what the business you wish to buy is worth. The advances made within the business appraisal profession concerning analysis techniques and resources have been substantial in just the last few years. It is highly recommended that you take great care to only engage someone who is up to date on these changes, which in most cases will be someone who makes business appraisal an important aspect of their full time profession. The preceding statement can be interpreted to mean that not every business broker or CPA is qualified to assist you in this effort.

On the other hand, most professional business appraisers, although generally knowledgeable regarding the income tax regulations pertaining to the sale and/or purchase of a business, are not specialists in this area. Be aware that federal tax laws and regulations surrounding business sale transactions are voluminous and complex, thus in most cases it is wise to have an expert examine your proposed transaction from this perspective.

Before getting down to the brass tacks of how to make a purchase offer, it’s a good idea to define exactly what a Purchase Offer is or should be. This may seem intuitively obvious but it really isn’t. For example in the case of Canfield versus Gill (101 Nevada, 170 170 (1985) Canfield v. Gill) Jacqueline Gill made what she thought was an offer to purchase Rick Canfield’s business. The purchase offer was contingent on Mr. Canfield training Ms. Gill in the operation of the business. During the training period prior to close of escrow, Ms. Gill decided she really didn’t want to go through with the transaction. She notified Mr. Canfield of this decision and requested a refund of her earnest money deposit. Mr. Canfield refused, maintaining that Ms. Gill had already bought the business and had to go through with the transaction. Ms. Gill sued Mr. Canfield for return of her earnest money deposit and termination of the contract. At trial, the court concluded that the “Sales Agreement” was merely an “option to purchase” based on Ms. Gill’s intent and instructed Mr. Canfield to return the deposit. Instead, Mr. Canfield appealed the lower court’s decision and the case was ultimately heard by the Nevada Supreme Court. The Nevada Supreme Court reversed the lower court’s decision on the basis of the precise wording in the Purchase Offer document itself. As it happened, the purchase offer was made on a standard Residential Purchase Offer and Acceptance Agreement which is intended to serve as both a purchase offer and a sales agreement for buying a home. The Nevada Supreme Court found in favor of Mr. Canfield, maintaining that the wording of the contract held more force than Ms. Gill’s intention which was only implied in the contract and instructed Ms. Gill to consummate the transaction. Instead, Ms. Gill filed for bankruptcy and Mr. Canfield got his business back and resold it for significantly less that the price Ms. Gill had agreed to pay.

The moral of this story is to be absolutely sure you know what you’re doing when you make an offer to purchase a business. The process may appear to the casual observer to be pretty much the same thing as making an offer to purchase a home but, in fact, it is altogether different. For starters, consider the Purchase Offer Form intended for the purpose of buying a business. Unlike the residential real estate sales industry which, within each regional market, typically uses a standardized printed form familiar to all agents and brokers, the purchase offer forms used by business brokers are almost always the unique creation of each business broker. Moreover, the differences apparent in the various Business Opportunity Purchase Offer forms in use is enormous.

Some Business Opportunity Purchase Offer forms are intended to serve as both the Purchase Offer and the Sales Agreement, just like the form used in residential real estate sales. On the other hand, some are not so intended. The one attribute nearly every Business Opportunity Purchase Offer form in use has in common, however, is that they are generally a Seller Biased contract. That is to say, the terms and conditions included in the contract and how they are worded favor the seller to the detriment of the buyer. But more importantly, many pro-buyer terms and conditions which could be included are never addressed. Thus, anyone who believes he or she is a careful reader and can effectively word-smith a printed form to appropriately adjust the nuances in a paragraph to lean more favorably toward the buyer, is committing the classic error of not seeing the forest because of the trees. Having said that, it is worth pointing out that the form presented here is an attempt to overcome this bias. That is to say, an attempt to present a more balanced contract.

Nevertheless, one should never assume that a printed Business Opportunity Purchase Offer form is safe to sign because it is “a printed form.” Nothing could be further from the truth. Never sign any contract associated with the purchase of a business without first having it reviewed by an attorney at the very least but also, in most cases, by a CPA, an insurance agent and, if you intend to use a third-party lender, that lender also and that includes the form presented here.

Perhaps a better way to go, albeit a more expensive route, is to have your attorney draft the purchase offer document in it’s entirety. Of course, if you have not already come to a reasonably close agreement with a business seller on the key issues of price and terms, the process of negotiating these matters by way of submitting purchase offers and fielding counteroffers can get very expensive. It’s best to have a verbal meeting of the minds on key issues before having them put into contract form by an attorney.

Assuming there is a meeting of the minds on price and terms, there are several contract development steps one can take. The route recommended here is (1) submit the Purchase Offer (2) get acceptance of the Purchase Offer, (3) conduct your “due diligence” investigation and clear the contingencies, (4) develop a definitive Purchase and Sale Agreement, Bill of Sale and, when appropriate, a Promissory Note, (5) sign the definitive agreements and close.

An alternative route is to submit a Letter of Intent as the first step instead of a Purchase Offer. Letters of Intent come in two varieties: Binding and Non-binding. There is little legal difference between a Binding Letter of Intent and a Purchase Offer, thus, if the LOI route is your preference, then it should be a Non-binding Letter of Intent. Once the letter of Intent has been signed by all parties to the proposed transaction, the “due diligence” investigation of the business begins. Upon completion of that step, a preliminary Purchase and Sale Agreement is drafted, the terms and conditions negotiated between the parties and put into final form. Only after the finalized Purchase and Sale Agreement has been signed by the parties has a legally binding commitment been entered into. This event typically precedes the close of escrow by several days or sometimes weeks or months. The closing may depend upon the buyer negotiating a new lease with a landlord or the parties accomplishing other tasks which must precede closing. On the day of closing, the buyer will require that all representations about the business the seller made in the Purchase and Sale Agreement are still true. This is accomplished by way of a “Bring-Down” Agreement which essentially says “every thing the seller said about the business in the Purchase and Sale Agreement is still true.” As the last step, the Bring-Down Agreement is signed and the transaction closes.

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