how to make an offer to buy a business

Buying a Business: Essential Guide

Purchasing an existing business can be a strategic move, offering benefits like an established customer base and proven operations. However, it’s crucial to approach the process wisely. This guide offers steps, advice, and contingencies to help ensure a smooth transaction.


Initial Steps and Information Gathering

  1. Secure Basic Financials
    • Start with high-level financials (profit and loss statements). Full tax returns and deeper details are often available only after an offer.
  2. Make an Offer with Flexibility
    • Use an Asset Purchase Agreement (APA) or a Letter of Intent (LOI), with contingencies that allow adjustments if issues are uncovered during due diligence.
  3. Understand Contract Types
    • Asset Purchase Agreement: Common for smaller businesses.
    • Letter of Intent: Frequently used for larger businesses, non-binding, and often preliminary.

Due Diligence Contingencies

  1. Due Diligence Period
    • Allow 2-3 weeks for due diligence.
    • Pre-arrange support from an accountant and attorney.
  2. SBA Loan Financing
    • If financing, approach multiple banks (2-3) and have a timeline for approval.
    • Standard SBA loans may require 10% down, with potential loan terms of 10 years (or 25 years if real estate is included).
  3. Landlord Lease Transfer
    • If leasing, ensure landlord approval to transfer or renew lease with terms satisfying SBA requirements (typically, a lease or options totaling 10 years).
  4. Immigration and Visa Considerations (if applicable)
    • Seek guidance from an immigration attorney to navigate visa requirements, especially if purchasing as a foreign buyer.

Additional Requirements (Franchises, Employees, and More)

  1. Franchise Approval
    • If the business is a franchise, confirm franchisor requirements, including training, updates, or remodels.
  2. Team of Advisors
    • Engage a business broker, attorney, and accountant with industry experience to support legal and financial reviews.
  3. Escrow Deposit
    • Negotiate a meaningful but manageable escrow deposit. Ensure it’s held by an independent third party like an escrow attorney.
  4. Reasonable Offer
    • Make an informed offer. Avoid paying above value unless the business’s quality justifies it.

Cash Flow and Financial Planning

  1. Assess Cash Flow Needs
    • Project if the business’s current cash flow will sustain loan payments and personal income requirements.
  2. Future Plans for Improvement
    • Plan and budget for potential improvements or upgrades that may enhance business performance post-purchase.
  3. Review Seller’s Disclosure
    • Utilize a seller’s disclosure form with clear yes/no questions on potential liabilities, grievances, or hidden issues.

Building a Connection with the Business

  1. Set up Observations
    • If possible, visit the business as a customer to get a feel for its environment and operations.
  2. Arrange a Meeting with the Seller
    • Prepare questions and documents in advance, respect the seller’s time, and take detailed notes.

Checklist for a Business Purchase

Initial Research

  • ☐ Sign an NDA to access financial information.
  • ☐ Review initial documents like profit and loss statements.

Making an Offer

  • ☐ Decide between an APA or LOI.
  • ☐ Include contingencies for due diligence, financing, and lease approval.

Due Diligence

  • ☐ Arrange for accountant and attorney support.
  • ☐ Secure SBA loan pre-approval and define timelines with banks.
  • ☐ Confirm lease terms with landlord.
  • ☐ Check visa requirements (if foreign buyer).
  • ☐ Complete franchise approval (if applicable).

Financial Preparation

  • ☐ Verify cash flow sustainability for loan payments.
  • ☐ Identify potential improvements needing capital.

Building Relationships and Final Checks

  • ☐ Meet the seller, observe the business, and take notes.
  • ☐ Review seller’s disclosure document for hidden issues.

By following these steps and maintaining flexibility, you’ll position yourself to make an informed and secure business acquisition.