01 Dec 2019
For the seller (owner of the business), offer and acceptance is one of the most exhilarating experience of the sale process. You can almost smell the finish line. However, most offers are just that - an offer. The sale is still far from being in the bag, although now the game is afoot. The sale process becomes critically important to avoid losing the buyer.
Often a buyer can make an offer verbally, informally or without serious intention. The most frustrating situation you'd like to avoid is to accept an insincere offer.
During the sale acceptance process, some buyers feels 'cheated' if the seller accepts their first offer without haggling or bargaining. They get buyers' remorse and become suspicious that they may have paid too much. Or could have secure the business at a lower price had they offered even lower.
Buyers' remorse can force the buyer to re-think and sometimes walk away from the sale.
By law, the business broker must present all offers to the seller where the seller has signed a document of intent or offer. I will insist on an offer in writing before I bring the offer to the vendor. This is to enforce some level of commitment and sincerity.
Some buyers will give an offer very, very early on without even doing any due diligence, inspection or discussion with the vendor. This is usually not a dependable offer and should not be depended or relied on.
This type of buyer seek to test if the vendor will accept their lowest price first before investing their time to examine at the business. They are trying to save time at the expense of the vendor's and broker's time.
If the early offer is accepted, the buyer will demand a thorough inspection of the business and likely to negotiate for further price reduction as he/she uncovers more 'shortcomings' on the business. For this reason, I'd advise the seller not to accept the offer until the buyer has enough information to make a proper offer in writing, or advise the buyer that there are no due diligence if the seller accepts and move to signing the Contract For The Sale Of Business immediately.
Before you accept the offer, you might like to confirm the buyer's eligibility with the help of your broker agent. There is no point accepting an offer if the buyer will fall short of the requirements relating to residency status, landlord requirements, financing or franchisor requirements.
I had one buyer who was extremely assured of his ability to pay for the business and led the seller on a trail of false hope. After his offer was accepted, his bank had still not approved the loan (and eventually did not approve) and the seller was extremely disappointed.
Many buyers wrongly assume that the bank will simply cough up the money if they stake a second mortgage on the family home or on another real estate property. Unfortunately, even with a secured asset, banks will still need to examine the business on its own merits.
Some business owners gets very angry or frustrated when a broker presents an unrealistically low offer from a buyer, especially when the expected asking price has been clearly communicated to the broker. This is a matter of law. The broker is obliged by law to present all offers to the business owner as a formality so refrain from getting angry or emotional.
Most offers do not include the stock-at-valuation (SAV) unless the business owner has indicated otherwise. Some sellers will include the stock for free, especially if the business does not lend itself to much inventory, or the agreed price is relatively high.
Otherwise, the inventory is calculated on the day of business settlement where the buyer pays the vendor for the stock upon mutual agreement.
The offer will most likely be subject to special conditions, such as landlord approval, franchisor approval, training, trial periods and other conditions as agreed by the parties. However, I'd normally advise against unreasonable conditions that may frustrate an inexperienced seller, such as 'subject to finance approval'.
The buyer should have the finance and the money ready. The sale of business should never be subject to finance approval by the banks on the Contract For The Sale Of Business. This is usually an escape mechanism for buyers to change their mind later on. You could spend months on the sale, and the buyer could simply ask the bank to reject the loan and pull out of the sale at any moment.
Accepting an offer is an exhilarating feeling, but there is more to be done. Photo: Pixabay.com
The Acceptance If you are selling your business at below market price with many buyers competing for your business, you are in the driver's seat and you can demand terms on the buyers. For example, you can request a Walk-In, Walk-Out (WIWO) sale, informally to mean that the buyer conducts minimal due diligence, no trial and move to exchanging the sales contract immediately. During the offer acceptance process, you can ask for more than the minimum recommended deposit. If your business is sold for cheap (say less than $50,000), you can request the buyer to pay the entire amount or most of the amount to the broker agency's trust account until the day of the settlement. Usually an acceptance of the offer is not serious until the buyer has paid a significant deposit. This usually happens within 1 to 3 working days. If the buyer starts to drag his feet on the deposit, this is usually an ominous sign that the offer was not serious, the buyer doesn't have the money or the buyer has had second thoughts about moving forward with the sale. For new and inexperienced buyers, indecision and cold feet are common. As an exit consultant and broker agent, I'd attempt to empathise and read the buyer so as to avoid unnecessary frustration and time wasting. At acceptance, both parties should be clear about and agree to the special conditions so that there are no disputes later on. For example, some business owners are only selling the on-going concern of the business, but not their business name and intellectual property. Or the seller will work in the business after the sale for an agreed salary or wage. At this stage, you as the seller should be in communication with the landlord (if a lease applies). You should understand the requirements (or personalities) of the landlord. Many sales have fallen over because of landlord rejection or complications. The business broker should vet and assist the buyer with the tenancy application form because the sale cannot happen without the landlord approving. One final important note. For offer-acceptance to be successful, both parties should move quickly to signing the Contract For The Sale Of Business because unless the contract is signed and exchanged, the buyer can still walk away from the sale and get the paid deposit back in full. On the flip side, the business is always still on the market until the Contract For The Sale Of Business is exchanged. The deposit does not provide legal standing or assurance that the sale will proceed. If another buyer comes along with a higher offer or better conditions, the seller is free to choose. Thus any unreasonable delays from either party can result in the sale falling over.
An offer and acceptance should be confirmed with a deposit. Photo: Pixabay.com
The Deposit The deposit is a powerful gesture that the buyer is serious. However in NSW Australia, the deposit is fully refundable until the Contract For The Sale Of Business is signed and exchanged, so technically the buyer has zero risk if the deposit is held by a reputable broking agency. After the contract is exchanged, the deposit will be treated in accordance to the terms of the contract. With this in mind, there is no reason why the buyer should not furnish the deposit upon the acceptance of the offer. I will always insist that the seller ask for 10% deposit of the agreed price or $20,000 minimum deposit. The deposit serves as two simple psychological indicators. Firstly, the minimum deposit tells me that the buyer is serious. If knowing that the deposit is fully refundable and the buyer is still hesitant, then the offer is probably not serious. The buyer may have limited funds, unsure about the business and looking to save the money for another deposit just in case a 'better' business comes along. Secondly, the deposit tells me if the buyer is financially abled. If the buyer is unable to furnish the minimum deposit of $20,000, he probably does not have the money to pull through with the sale and likely to waste everyone's time.
Josh Foo contributed to this post.
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