You’ve signed non-disclosure agreements, read many confidential business profiles and narrowed it down to several businesses you like. You’ve reviewed the Seller’s Discretionary Earnings worksheet and perhaps you’ve even had a buyer/seller meeting. The business is a good fit for your transferable experience and skills, and you understand how to grow it. The next step is to write a contingent offer.
What is a contingent offer?
A contingent offer is an offer to purchase the business at a certain price under certain closing conditions. A contingent offer assumes that all of the information that has been given to you is accurate, but it also contemplates that you will need to perform additional due diligence before you’d be willing to close on the deal.
It is called contingent offer because there are built-in contingencies to protect you. For example:
(This offer is contingent upon the buyer’s inspection of the financial statements of the Business to Buyer’s satisfaction, including Profit & Loss statements, Balance Sheets and corporate Tax Returns.)
A contingent offer is similar to a Letter of Intent. It allows you to communicate to a seller that you are interested and find out if they are willing to sell at a price that makes sense to you.
It also is a sign of confidence that you are a serious buyer. Sellers do not want every Tom, Dick, and Harry to have access to years of records and personal information unless they are serious about purchasing the business. The contingent offer is a big step for you as a buyer to put a price on paper and show some good faith that you are serious about buying the business. This gives the seller confidence in you and it gives them the reason they need to further open up the books and confidential material for you to review.
- If you are still working on financing, you need to disclose that this offer is assuming you will gain the proper financing:
(This offer is contingent upon the buyer obtaining satisfactory financing for the purchase of the business.)
- If the business operates under a property lease:
(This offer is contingent upon the buyer’s assumption of the existing lease for the Business premises Fixed Assets and Inventory)
- Closing Date and Place: Pick a closing date a location that will give you enough time to dive into the details of the business. More complex businesses will require more time and less complex businesses will require less time.
- Inventory Level: If the business holds inventory for resale there needs to be an agreed upon level of inventory at closing. Typically, it will be stipulated that the inventory level of the business on the date of closing will be consistent with normal operations. If there is a greater amount of inventory on the closing date, the price will reflect that. Furthermore, if inventory is less than what was agreed upon, this contingency can be invoked. There are many ways in which to handle this in an offer.
- Training: In some cases, you will want to negotiate a period of time that the previous owner will stay on to train you in on certain aspects of the business.
- Non-Compete Agreement: Some sellers’ want to retire for good. Some sellers are entrepreneurs that are going on to start other endeavors. This part of the offer will state an agreed non-compete period.
- Removal of Contingencies: All of the contingencies are subject to the buyer’s (your) satisfaction and are to be waived once satisfied. Contingencies may also expire on an agreed upon date. After satisfaction of the contingencies, the parties agree to have final closing documents drafted by an attorney.
- Offer Deadline: There is an expiration to your offer. If the seller does not respond in time, the offer become null and void.
A contingent offer is just that, contingent. It is written to protect you as you dive further into the business. It is also written in order for you to gain better access to the information you need to take the next steps towards the closing table.