When the time comes to making a formal offer on a business, you will do so via a Letter of Intent (LOI) or a formal Offer to Purchase Agreement (PA).
The one you will use depends upon several factors including deal size, what terms have been agreed upon thus far and the buyer’s goal with the offer.
Generally, smaller transaction may skip the LOI portion, however my rule for an LOI versus a PA has always been: if the seller’s asking price and my valuation are far apart or I want to lock up the business quickly, or, perhaps I may be using the offer to access additional documentation from the seller, I use an LOI.
It’s quick, non-binding (most clauses) and inexpensive to have an attorney draft.
In future posts I will be discussing various aspects and clauses inherent to both of these offer documents, but for now, I want to focus upon the philosophical side of making a formal offer to buy a business. I completely understand anyone being apprehensive about making an offer; I’ve been in the exact same shoes. It’s exciting yet scary. But, you have to get over it. Making offers is part of the business buying process.
Furthermore, it’s the only way to take a seller’s temperature and see what they’re REALLY thinking.
Additionally, a buyer has to realize that no legal agreement between a buyer and seller can account for every possible scenario that may arise.
Of course, a good attorney will make certain you’re properly protected in the deal and so too with the lawyer representing the other side of the deal. However, the point of an agreement is not to try to identify every possible situation that may arise. Rather, it provides the process by which situations that come up are dealt with.
For example, what if the seller did not remit accurate payroll taxes? IRS issues follow the business so while you may only be buying the assets of the business, you’re still liable. Or, what if the seller does not provide the agreed upon training? What if there are former employee lawsuits against the business, or supplier claims for unpaid bills that arise? There are hundreds of other such examples. However, it’s impossible to identify each and so the agreement itself will have language that deals with the possible breaches that may arise after closing which may be a result of seller actions prior to the closing. The agreement will provide a mechanism to resolve them.
It’s also important that buyers familiarize themselves with the general terms and conditions of a business purchase agreement so you’ll know how to effectively negotiate one. Be sure to reference the sample agreement in our various “How To Buy A Good Business At A Great Price” guides in the section on Negotiating the deal and making an offer.
As a final word: