Making a Contingent Offer

What is a contingent offer?  An offer based on the information provided by the seller, and or, broker, prior to having performed due diligence.  The contingencies protect a buyer and allow the buyer to make an offer early in the acquisition process.

 

Why use a contingent offer?  Contingent offers are a way to negotiate a purchase price and deal terms without having to invest the time and expense of due diligence.  If a buyer and seller can’t come to agreement on price and terms, it doesn’t make sense to move forward.

 

We find too often that potential buyers want to move in many directions once they’ve discovered an opportunity that interests them.  “Let me talk to the landlord”, “I’m scheduling meetings with lenders”, “I’ve engaged an accountant to begin due diligence”, and the list goes on.  Of course a buyer should get excited and want to get things moving, but moving towards what end?  Until a deal is in place, it’s just spinning wheels.  For example, a lender can’t provide a loan package until they know the agreed upon price, down payment and whether there’s a seller note involved – at this point they don’t even know the amount of a loan needed.

On the other side of the deal, the seller doesn’t know if this is a “real buyer” or not.  Until an offer is made, everyone is just a prospect.  Until they have an accepted offer, they don’t want to expend much time, energy and money.

This is where a contingent offer comes in.  A buyer can negotiate with the seller, with little or no risk, to find a deal that works for both parties.  Once this step has been accomplished, everyone now has a goal to focus on and both parties are ready to push towards the finish line.

Typical contingencies include:

  • A satisfactory review of all financial information
  • The ability of the buyer to get third party financing at acceptable rates and terms
  • The ability to negotiate a lease at acceptable rates and terms
  • Development of a mutually acceptable training and transition plan
  • Development of a non-compete agreement

 

And the list can go on.

 

If, during or after due diligence, the buyer is not able to clear the contingencies, they can either adjust their offer or they can walk away.

For more information about buying a business, contact us at [email protected] or [email protected].

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