Receiving a purchase offer on a business is very often perceived by business owners as the “finishing line,” whereas in reality, this is only the first step in transferring a business.
“Too often, we can sense the business owner’s excitement and relief from finally having received an offer” says Achim Neumann, President of A Neumann & Associates, New Jersey,” however, in reality the work only starts at this point.”
Typically, the first step is to review the type of offer. If the offer is a Letter of Intent, then in most cases it is binding on the seller’s part, but leaves a buyer with considerable freedom to make decisions— including whether the buyer wants to ultimately move forward or not. Preferably, both parties will agree on an Offer-To-Purchase agreement that spells out specific timelines and tasks for each party, and if they are not maintained, will render the offer invalid.
“Each offer differs, and in this process it’s important to provide the least amount of credit exposure for the seller” says Gary Herviou, Director Marketing, Central New Jersey. “For example, if the offer provides no credit collateral for a desired seller note other than just the business assets, then we need to determine if the assets can be ‘secured’ by way of an UUC (Uniform Commercial Code) filing, and whether they are sufficient as loan security.”
Once the offer is accepted by both parties, the due diligence process starts.
“Very often buyers perceive the due diligence period as a time when they can ‘make up their mind’ about whether to purchase the business or not,” explains Michael Gersten, Director Marketing, North Jersey, ”whereas due diligence is indeed a period to merely verify the information presented in the confidential memorandum.”
For instance, if the information presented in the prospectus differs significantly from the documents received—such as payroll records, banks statements, tax filing, etc.—then the buyer has to determine if he wants to abandon the deal or renegotiate it further. It is important that a seller is forthcoming with all documents that the buyer requests at this time.
Part of the due diligence process includes establishing the lending facility for the buyer to acquire the business. “Fortunately, we have been in an excellent position and can refer various lending sources to a buyer” says Neumann, “and despite a few exceptions over the past three years, obtaining funds to acquire a business has been successful in the majority of closings.”
Sophisticated Merger & Acquisitions professionals such as A Neumann & Associates will have a well-established network of lenders to ensure sufficient funding at closing.
Finally, a seller needs to help a buyer to transfer licenses. This can be applicable for professional licenses, such as medical practices, legal, engineering, architectural or plumbing licenses, or it can be a matter of transferring Medicare vendor numbers, etc. Each business transfer has its own challenges and a good M&A firm will have experience in the transfer of such licenses. A solid offer will also spell out how long the current business owner will stay on to train and facilitate the license transfers after the closing date.
In sum, it is important for a business seller to recognize that receipt of an offer is the “beginning” of the business transfer process, not the “end.” A well orchestrated transfer will not only result in a successful future business and a happy new owner, but will also yield a timely and consistent payments on the seller note— a goal both parties should keep in mind.