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Why write a contingent offer to purchase?

By: Connor Grimes-Managing Partner CBI+Team of Central Arkansas

I listed Willy D’s Piano Bar in Central Arkansas back in 2010. Buyer inquiries flooded our office. Every day five to six “buyers” contacted us and expressed interest in buying Willy D’s. Every potential buyer lead was followed up with according to CBI+Team protocol. As always, we had the potential “buyers” fill out a non-disclosure agreement, a one page financial statement and a seller disclosure sheet. According to company policy, we then spent time teaching those “buyers” who filled out the paperwork the CBI+Team method of buying a business. The steps are as follows:

  • After filling out the buyer documents and meeting with the listing intermediary “buyers” were given a username and password to access the Willy D’s deal room.
  • “Buyers” were encouraged to study the information in the deal room which included an Executive Summary of Willy D’s, a recast of the financials and other pertinent information.
  • Once “Buyers” reviewed the information, we encouraged potential “buyers” to visit Willy D’s in person, keeping it a secret as to who they are, as to protect confidentiality.
  • Once the potential “buyers” have reviewed the information and visited Willy D’s, the next step is to write down as many questions as they can think of. They are now given the opportunity to visit with the owners of Willy D’s face-to-face. The “buyers” are welcome to ask as many questions as they like with the exception of two, purchase price and terms. That comes later.
  • Once the “buyers” have had the opportunity to meet and visit with the owners of Willy D’s, they should have a good handle of whether or not they want to buy the business or move on to the next opportunity.. If the “buyer” decides they are interested in owning the business, the next step is making a contingent offer to purchase.

This is what separates “potential buyers” from “real buyers”,. making a contingent offer to purchase. What is a “contingent offer to purchase”? It is an offer based on the information that the seller has represented about the business. The seller must prove that what they have represented is true. If true true, then a buyer agrees to pay $X for the purchase price of the business on X terms, in other words, the buyer bases the contingent offer on what the buyer thinks the business is worth and on terms the buyer can live with.. However, during or after due diligence ,if the buyer is not satisfied with what they see during due diligence, they can either adjust their offer or they can walk away. Some of the contingencies we have already included in the offer are as follows:

  • Buyer to review and APPROVE of 3 years tax returns, P&Ls, balance sheets.
  • Buyer to review and APPROVE of lease
  • Buyer obtaining financing on terms ACCEPTABLE to buyer
  • Buyer review and APPROVAL of furniture, fixture and equipment list

Those are just a few examples.

Now, here is a lesson for you who may be considering buying a business. As mentioned before, over a hundred “buyers” expressed interest in purchasing Willy D’s but only one “offer.. Danny Brown bought Willy D’s. It was his second business to buy from the CBI+Team. Danny knew the system and knew that in order to get into a first position, he wanted to write the first offer. Other “buyers” had met with the owners of Willy D’s but then they all decided to “think” about it. They “thought” a little too long. Danny came in after many of them but he knew that a contingent offer to purchase would get his foot in the door ahead of anyone else. He also knew that if he didn’t like what he saw, he could either adjust his offer or he could walk away. Danny wrote the contingent offer to purchase and after some negotiating, Willy D’s was under contract. Danny did his due diligence, adjusted his offer accordingly and now has owned Willy D’s for four years.

In case you are wondering, yes, some of the other “buyers” called or emailed and said they were ready to write an offer. We had to tell them that they were still more than welcome to write a contingent offer to purchase but they would be in a back-up position.

Do NOT be afraid to write an offer on the business you think you want to own. Writing a contingent offer to purchase shows the seller that you are motivated and you want to learn more about their business. If you wait too long, you may see a wonderful business like Willy D’s slip right through your fingers.