You've just gotten an offer for your business. Congratulations. You're probably feeling as if the deal is done or you can at least see the finish line. As a business broker, I obviously deal with offers to purchase businesses all the time. So before getting too excited, let me offer a few tips that I use in evaluating an offer. You should think carefully about these items and confer with your business broker before responding:

Is It In Writing?:

This may be obvious, but unless the offer is in writing it's not a serious offer. The buyer may have the best of intentions in making a verbal offer, however as I describe below, there are too many items that need to be clarified and defined beyond the price that's thrown out in a typical verbal offer. If someone makes you a verbal offer, I'd suggest that you thank them and then ask them to put it in a non-binding offer letter or letter of intent.

How Much Is Guaranteed?:

You can think of the offer somewhat like a layer cake. In order of attractiveness, offers typically include 1) payments made in cash at closing, 2) guaranteed payments made over time through a seller note and secured by the assets of the business, 3) contingent payments that will be payed only if the business achieves certain milestones. In addition, you may be offered stock in the company making the offer. So you need to look at each of these items separately and assess the risk, as well as tax consequences.

What's Being Purchased?:

The after-tax proceeds you get are heavily dependent upon whether the buyer is purchasing the business's stock or assets. A future post on this blog will demystify stock vs asset sales. Asset sales are far more common for small businesses. Assuming this is the case, what assets are being purchased? Will the buyer expect to acquire your accounts receivable as part of the deal? Real estate? Inventory? One of the reasons written offers are so important is because it forces to buyer to make clear what's being bought. Without a clear definition of what the offer covers, there's likely to be a major misunderstanding that will need to be addressed down the road.

What Are The Contingencies To Close?:

Before getting too excited about the offer, evaluate what needs to happen to close the deal. Does the buyer have a financing contingency? If so, you need to dig deeper to understand how likely they are to secure financing. For example, if you're dealing with a large company that has existing banking relationships, that's obviously far less risky than an individual who's about to go knock on the door of local banks or try to line up investors. You should also evaluate how extensive the due diligence process will be and over what timeframe.

What Restrictions Will Be Placed On You By Accepting?:

Offers to purchase are typically non-binding. It's just too easy for a buyer to wiggle out of the deal, if they choose to do so. However, you may have some ironclad restrictions. One of the most common is a so-called "no shop" provision, requiring that you effectively take the business off the market while finalizing the deal with the buyer. So in evaluating the offer, consider whether it's worth being locked up.

How Much Are They Willing To Put Down As A Deposit?:

A great way to evaluate how serious they are is simply how large a deposit they're willing to put down. Deposits are typically placed in escrow with an attorney or business broker. A deposit of 10% of the total proceeds is fairly typical. If it's anything below that, you might question how serious they are.

Offers are a good thing. If you've gotten one, even if it's a verbal offer, consider that a sign of progress. However, do your homework and carefully evaluate the offer before accepting it.

The Coral Group is a business broker, specializing in the sale of owner-run businesses in the Greater Boston and New England areas. To learn more about selling your business, the Coral Group web site, (see link below) provides real-world, practical advice. Coral Group Web Site: http://www.coral-group.com

About the Author:

Sam Liss is President of The Coral Group, LLC, a business brokerage firm based in Wellesley, MA. Sam has over 10 years experience selling privately-held, small businesses and has spoken and written extensively on the topic of exit planning. He holds an MBA from Columbia Business School and a BS in electrical engineering from Syracuse University.