Mergers & Acquisitions

Guide to Buying a Business

Make an Offer

Following is a summary of the next steps in the process if you wish to make an offer on the business:

  • Term Sheet: The Term Sheet, which you complete, is a checklist of the key deal points you should consider before making an offer on the business.
  • Offer: Once we receive your Term Sheet, we will prepare an offer to purchase if you are purchasing a small business or a letter of intent (LOI) if you are a company or private equity group and are purchasing a mid-sized business. Alternatively, you may have your attorney prepare an offer or LOI on your behalf.

Term Sheet

The Term Sheet is a checklist you can use to walk through the key deal points to consider before you make an offer. The Term Sheet is for discussion purposes only. It allows you to focus on structuring the key elements of the transaction without concerning yourself with the formal language required to document those terms.

The purpose of the Term Sheet is to enable you to focus on the critical elements of the transaction before we prepare your offer. The Term Sheet is a short bullet list of the critical points of the transaction, such as the selling price, earnest money deposit, down payment, financing terms, length of time for due diligence, training agreement, non-compete agreement, contingencies, and other essential terms.

You’ll want to decide on the following basic terms of the deal before you make an offer:

  • Selling price
  • Earnest money deposit
  • Down payment
  • Amortization period
  • Interest rate
  • Due diligence length
  • Training length
  • Non-compete agreement
  • Closing agent or attorney
  • Any contingencies

Click here to download the Term Sheet

Offer or Letter of Intent

Once we receive your Term Sheet, we will prepare an offer to purchase if you are purchasing a small business, or a letter of intent (LOI) if you are a company or private equity group and are purchasing a mid-sized business. The offer/LOI is commonly drafted by the buyer if the buyer is a private equity group or other company — we customarily draft the offer on behalf of the buyer if the buyer is an individual. You will have the opportunity to review the offer before it is presented to the seller.


The offer will contain a list of contingencies that the parties attempt to resolve before a purchase agreement is signed. These could include the buyer obtaining approval for a license or securing bank financing.

Addendum to NDA

The offer also includes an addendum to the non-disclosure agreement. This is required because you are requesting additional information on the business and will have access to sensitive, private information such as bank statements, tax returns, and detailed financial statements.

Offer/LOI vs. the Purchase Agreement

The offer doesn’t contain the necessary language for a closing; however, it allows both parties to commit to the essential terms so they can begin due diligence and begin preparing the purchase agreement. The offer is replaced by a purchase agreement prior to closing. Remember, you are not committed 100% until the due diligence period is finished.

Here are the primary elements of the Offer/LOI:

  • Purchase price & terms
    • Earnest money deposit
    • Seller note — length, interest rate
    • Bank financing
  • Transaction structure
    • Asset sale
    • Stock sale
  • Due diligence — length
  • Contingencies
    • Bank financing
    • Third-party approvals — landlord, franchisor, distributor, etc.
    • Licensing
  • Confidentiality: Some offers/LOIs include language addressing confidentiality that supplements the initial NDA.
  • Expiration date: The LOI should include an expiration date, so you don’t have an open-ended commitment.

Who writes the offer — the buyer or the seller?

We can prepare the offer for you. Many buyers are first-time buyers and are not comfortable with preparing an offer on a business.

What is the difference between an offer to purchase and a purchase agreement?

An offer to purchase is the document used when a buyer makes an offer before the due diligence period. The purchase agreement is the document signed at the closing after due diligence is completed.

Earnest Money Deposit

If the seller accepts your offer/LOI and you are an individual or small company, you will make an initial earnest money deposit. The earnest money deposit is typically 5% of the purchase price. This earnest money is applied toward the purchase price at your closing. Earnest money is held jointly by a third party or escrow agent. Earnest money deposits offer demonstrable proof you are serious about purchasing the business.

Assets Included

The asking price normally includes the following assets:

  • Furniture, fixtures, equipment, vehicles (and all other hard assets used in the business)
  • Leasehold improvements
  • Training
  • Covenant not to compete
  • Business name, website, email addresses, phone number, software
  • Business records, financial records, client/customer lists, marketing materials, contract rights
  • Trade secrets (whether registered or not), intellectual property (patents, trademarks, etc.)
  • Transfer of licenses and permits

Inventory & Supplies

Inventory may be included in the sale but priced separately. The buyer will purchase inventory separately at closing, in addition to the purchase price of the business.

What is the difference between equipment and inventory?

Equipment consists of fixed assets, such as machinery, tables, chairs, vehicles, and other assets used in your business.

Inventory is salable and consumable and must be constantly replenished, such as fuel for a gas station, or raw materials for a manufacturing facility, and so on.

The asking price does NOT normally include the following assets:

  • Real estate and land (this can be sold but should be priced separately)
  • Assumption of any liabilities, debt, or accounts payable
  • The seller’s entity (Corporation/LLC), unless the sale is structured as a stock sale

The asking price sometimes includes the following assets:

  • Working capital or cash in the bank: Working capital is often included in transactions in excess of $5 million to $10 million.
  • Accounts receivable (AR): The buyer and the seller will discuss how AR will be handled after the closing.

Asset vs. Stock Sale

When buying or selling a business, a transaction generally takes one of two forms: an asset sale or a stock sale.

Asset Sale

In an asset sale, the buyer (e.g., John Smith) or their entity (Corporation, LLC, etc.) purchases the individual assets of the business from the seller. The seller retains ownership of the entity after closing. The buyer forms an entity and that entity purchases the individual assets of the seller (technically the seller’s entity: Corporation, LLC, etc.).

The parties jointly decide which assets and liabilities are included in that transfer. The sale usually includes all hard assets necessary to operate the business, such as equipment, supplies, and inventory. The seller usually retains ownership of the accounts receivable, cash, and working capital. However, working capital is often included if the buyer is a private equity group or corporate buyer.

Stock Sale

In a stock sale, the seller (e.g., John Smith, as an individual) sells the actual ownership of their entity (Corporation, LLC, etc.) to the buyer. This would be similar to owning a share of Ford Motor Company and selling this share of stock to another individual.

In a stock sale, the buyer purchases the seller’s entity (Corporation, LLC, etc.). By purchasing the seller’s entity, the buyer then owns the assets owned by the entity. Generally, in a stock sale, the buyer purchases everything owned by the seller’s entity — including liabilities.