4 Best Practices for Making a Business Offer
I have an opportunity to purchase a frozen yogurt shop in my community. It is already up and running and generating revenue. How can I show the current owner that I am the best candidate to buy the business? What should be included in my financial plan?
Typically, the buyer does not have to prove to the seller that they are the best party to purchase the company. Sure, current owners will want to have peace of mind that the business they put their blood, sweat and tears will still be a 'going concern' a year after the sale, but price will generally be the biggest factor in determining who purchases the business and at what price. Having said that, there are certainly best practices to consider when making an offer.
How to approach the seller. While no business deal is exactly the same, anyone involved in a prior acquisition/merger will tell you that the relationship and personalities of the buyer and seller were important factors in finalizing the deal. As such, it would be in your best interest to obtain a very warm introduction from someone you know that also knows the owner of the shop. This will help in gaining the confidence and trust of the seller and it should speed up the process as a whole. In addition, if the company is not currently up for sale, you will want to be strategic in determining if, at the right price, the owner may sell.
Preliminary due diligence. As the potential buyer, you should be assessing the value and growth prospects of the business. This means reviewing the current employees, company culture, business trends, expansion opportunities, customer feedback, competitive landscape, among other factors. In addition, not only do you want to ensure that this is a viable and growing business, but that you are the best person to lead it. Not only will this impress the owner, but your research might help shape the offer you give and strengthen your negotiating power.
Formulating your offer. When you prepare to make an offer for the business, it is best to have an understanding of how the current owner values the business. Specifically, if you're going to go through the process of negotiating, it is best to have a sense for how the seller views the valuation. To do this, ask them what key performance indicators (KPI) they review when assessing the health and growth of the overall business. If it's recurring monthly revenue and you have a sense of the size of that customer base, it's easy to gain an understanding of how the owner values the business.
Closing due diligence. Once you reach an agreement with the seller, you'll still want to confirm the accuracy of the financial and business data provided by the seller. You may need to work with a few attorneys and possibly an accounting firm to complete this final part of the deal. Hopefully, if your research has been thorough, there will be no unpleasant surprises.
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