"What are the next steps to make sure that both the seller and buyer are protected, and most importantly move forward on fair/balanced terms?"
Following last week where we spoke about disclosure of business information that leads up to an offer, now, hypothetically you have confirmed your indicative offer. This is a significant achievement for the seller and buyer, though it is not time to crack the champagne just yet! (We are getting closer though)!
Just like the sale of a house, a buyer will be required to pay a deposit at this stage. This deposit sends a message to the seller that says “we are serious and this deposit demonstrates our intention to purchase the business, provided that our due diligence investigations are consistent with the information you have provided."
It sounds simple enough, though there are some key principles and key considerations that we, as business brokers and advisors, must adhere to.
The first thing a buyer and seller need to be clear on is the terms of the deposit. Unlike selling a home, there are variables at play.
Is the deposit fully refundable and under what conditions?
In smaller business transactions such as retail, typically deposits are refundable. However, for businesses with substantial IP, trade secrets or key customers, a buyer may need to leave some “hurt money” on the table.
Does the deposit buy an exclusive period for the Purchaser to complete their due diligence, which may involve some high-risk disclosure?
We touched on this in last week’s wrap up.
Then, if the seller will take the business off the market in good faith, what happens if the purchaser changes their mind and the seller has lost the opportunity to consider offers from other buyers?
A seller could reasonably ask for a non-refundable deposit in exchange for an exclusive period, especially if there is a significant interest in the business.
On the flip side, if the purchaser has paid a non-refundable deposit and then finds material variances during due diligence compared to the information they based their offer on, what will happen?
It would only be fair that they get their deposit back.
We find it is best for a seller to let the Purchaser decide and offer this formula:
1. Deposit is refundable = Business stays on the market.
2. Deposit is non-refundable = Offer is exclusive.
3. Material variances found = Deposit is refundable.
Once the terms of the deposit are clear, and expectations set on everyone’s side – it is time to get cracking on Due Diligence.
As always, we have our thoughts on this topic. DD is the most anxious time in the process for everyone, and the major cause of a sale falling over. The seller and buyer are in the sale cycle where they are fully apposed before they start the swift journey back to where their mutual interests meet in harmony, perfectly aligned.
It is critical to the sale that Due Diligence is structured.
There are a number of buyers we have spoken to lately who started DD months ago, and they STILL haven’t finished. We know there is something going wrong!
Selling or buying any business is intricate, challenging, and potentially extremely rewarding for both. We love talking shop, so if you need assistance with your transaction – give us a call for a no obligation chat.
(m) 0401 620 918
(t) (02) 8923 2632
(m) 0450 326 146
(t) (02) 8923 2632