How to accept an offer from the buyer safely and only when you are ready

By Josh Foo, Senior Partner

Updated 8:20am AEST, August 28, 2019

(Onwardbull.com.au) - If you are the seller, an offer is an exhilarating experience, especially when you have been waiting for a while for one.

 

You can almost smell the finish line.  However, most offers are just that - an offer.   The journey has just begun.  The sale is still not in the bag, although now the game is afoot.

 

The sale process now becomes critically important to protect your business and at the same time to bring both parties to a successful sale. 

The Dangers  

 

Too many sellers and their agents drop the ball and the sale collapses, or the business is seriously damaged. 

 

Some of the dangers are:

  • Breach of confidentiality:  Employees are aware of the sale and they leave or damage the business

  • Breach of confidentiality:  Clients are aware of the sale and they leave

  • Breach of confidentiality:  Trade-secrets are stolen in the process

  • Breach of confidentiality:  Competitors are aware of the sale and they poach your clients and employees

  • Where approval of the landlord is necessary for the sale, losing rapport with the landlord could be disastrous.   The landlord could become uncooperative if they have to deal with tire-kickers or subpar prospects

  • Wasting months with the wrong buyers and closing the door to the right buyers

Interest From Buyers

 

If you are fortunate enough to have multiple buyers competing for your business, you are now in the driver's seat and you can demand terms (this can happen if you are selling your business at a low price, or for some reason, your business is unique or in-demand)

One of the ways you may wish to sell your business is known as WIWO (Walk-In, Walk-Out), informally to mean that you will only allow buyers to conduct minimal due diligence and you will not provide supporting documents or allow a "trial" of the business. 

 

WIWO sale usually works for businesses selling for cheap where the buyers are paying for the business assets, the rights to the lease, or something extraneous to the business.  If the price sold is low (say, less than AUD$50,000), you can ask the buyer to pay the entire amount in escrow to the agent's trust account rather than a partial deposit.

 

If the sale is not WIWO, then the buyer will probably need to conduct due-diligence with your help and co-operation.   This is the part that is tricky.  

Every business is different with regard to trade secrets and risks.   If your business is in possession of highly valuable "trade secrets" and/or your business is exposed to serious consequences from a breach of confidentiality, then prior to any due diligence, you may request that the buyer furnish a substantial deposit to be held in escrow in the agent's trust account along with a request to sign a Memorandum of Understanding, a dedicated Confidentiality Agreement, and some ID checks.

Typically, most sellers will release some "teaser" documents to prospective buyers.  If the buyers are still interested to pursue further, this is where the seller may request a deposit and take some action to protect the interests of the business.  

All these may culminate into an offer.   There is no way to know if the offer is serious or not until the buyer has placed a significant deposit into the agent's trust account (if it hasn't happened yet).   

An offer is an exhilarating experience but the game is afoot.  PHOTO: Pixabay.com 

The Offer  

Often, a buyer can make an offer verbally, informally, or with no serious intent.  It is extremely frustrating to accept an insincere offer.    

 

During the sale acceptance process, some buyers feel 'short-changed' if the seller accepts their first offer without any haggling or negotiation.  They get buyers' remorse, regretful that perhaps they may have offered too much.  They think to themselves that the seller would have accepted a lower price.   

Buyers' remorse can force the buyer to re-think and sometimes to walk away from the sale.  

By most regulations, the agent must present all offers to the seller where the buyers have put their offers in writing. 

Some buyers will give an offer very, very early on without even doing any kind of due-diligence or inspection on the business.  This is usually not a dependable offer.  The buyer is probably looking to short-list suitable businesses based on price.

This type of buyer seeks to test the seller on the price before they are willing to invest their time looking at the business.  They are almost certainly looking for a bargain because the listing price is usually publicly available and they are looking to "stress-test" the seller on the price. 

 

This type of buyer is thus trying to save time at the expense of the sellers' time.  If their offer is accepted, they will then move onto the next phase of their buying process.  This may entail a thorough inspection of the business and could result in further price reduction if they uncover 'shortcomings' in the business.   The seller may be running around like a headless chook doing the buyers' bidding. 

For this reason, I'd highly recommend that the seller put aside the "offer" and qualify the buyer first by requesting a meeting and asking the right questions of the buyer in the meeting.     

There is no point in accepting an offer if the buyer is not suitable in any way, or fall short of the requirements relating to residency status, landlord requirements, funding capabilities, and/or franchise rules.

 

"False-positives" are common.  I had one buyer who was so sure of his funding situation and led the seller on a trail of false hope.  After his offer was accepted, his bank refused to approve the loan.  The seller was extremely disappointed because he had just wasted months on this buyer. 

As a seller, you should not feel awkward or guilty in asking the tough questions of the buyer to say yourself troubles later on.

If the offer is sincere, then the parties should discuss the crux of the sale, such as the expectations of both parties, and agree in principle the conditions of the sale prior to the sale contract being drafted by the solicitor.   If the parties do not meet and discuss the conditions of the sale prior to assigning the sale to the solicitors, then the lawyers on both sides could make the process painful, give rise to misunderstandings, and could take months to piece together everything.   

Some of the things both parties will need to agree on are:

  • The duration and type of training & handover

  • Restraint clauses

  • Who will pay for the landlord's legal fees (if any)

  • Penalties and interests to be paid for delays (if any)

  • Settlement date (and whether the sale will be nulled and void if past this date)

  • The proper transition of business creditors and debtors (if any)

  • How, when, and where to conduct a "trial" of the business 

  • The ownership of trademarks and intellectual property

  • Confirmation of assets included in the sale

Keep in mind that the solicitors are paid to give advice in the "interest" of their clients.  So the opposing solicitors of the parties are unlikely to meet eye-to-eye.  It is up to the buyer and the seller to agree on a compromise, and then to instruct their solicitors accordingly.  

Remember, in NSW Australia, buyers generally can legally pull out of the sale and get their deposit back at any time prior to the sale contract being signed.  The more painful the process is, the more likely the buyer will give up and ask for their deposit back.

"False-positives" are common so ask the tough questions of the buyers to avoid troubles or disappointment later on.  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 (exchanged) between the parties.

 

After the contract is exchanged, the deposit will be treated in accordance with the terms of the contract. 

The deposit is one of the clearest indicators of whether the buyer is serious or not.   As the deposit is refundable until the exchange of the contract, the seller may request a deposit at any stage of the seller-buyer interaction.    For example, you may request a deposit prior to the release of any confidential documents on the business. 

 

Conversely, if buyers refuse to front a deposit to be placed in a trust account of a reputable agency with the full protection of the law, it probably means that the buyer is not serious, or they lack the funds to proceed with the sale.   

There are no hard and fast rules around deposits (other than the legislation itself) but as a benchmark, the seller should request a 10% deposit or a minimum of $20,000 from the buyer whichever is the higher.   A figure less than this may not work to stress-test the sincerity of buyers.

The Take-Away

An offer from a buyer could be exhilarating but at the same time fraught with danger and risks to your business. 

As every business is different, the approach to the finish line will need to be customized to the risks faced by your business.  A competent and experienced specialist can guide you safely and when you are ready.*

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