Making and evaluating offers

After a buyer has investigated a number of companies, they will then make an offer. An offer may take the form of a purchase and sale agreement or a letter of intent. Although they have different names, the two documents serve the same purpose; both are means of documenting a buyer’s expression of interest.

Regardless of which form of documentation is used, it should contain the following:

  • Total price to be offered
  • Components of the price (for example, the amount of security deposit and down payment, amount of seller financed debt)
  • A list of all liabilities and assets being purchased. The minimum amount of accounts receivable to be collected and the maximum amount of accounts payable to be assumed may be specified.
  • The operating condition of equipment at settlement
  • The right to offset the purchase price in the amount of any undisclosed liabilities that come due after settlement and in the amount of any variance in inventory from that stated in the agreement
  • A provision that the company will be able to pass all necessary inspections
  • Warranties and representations of clear and marketable title
  • A provision (where appropriate) to make the sale conditional on lease assignment.
  • A provision for any appropriate proportions such as rent, utilities, wages and for prepaid expenses such as insurance, utility deposits and license fees
  • A noncompetition covenant. This document is sometimes part of and sometimes a separate exhibit to the purchase and sales agreement.
  • Allocation of the purchase price
  • Restrictions on how the company is to be operated until settlement.
  • A date for settlement.

The purchase and sales agreement is a complex document and it is essential to get professional help in drafting it.

When evaluating an offer the seller should look for the same provisions in the agreement document. A seller should also ask for a resume and a financial statement from the potential buyer. Great potential buyers are those who:

  • Have a commitment to the work ethic
  • Successful related work experience
  • Has a logical reason for acquisition of the business
  • Are willing to provide a post-acquisition plan

It is also important for a seller to carefully study the offer in order to determine what assets and liabilities are being purchased. An offer for the assets of a business may be worth considerably less than an offer for its stock, even though the price offered for its stock is considerably higher.