Back Up Offers: Are They Worth It When Buying A Small Business?
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Things To Consider:
1. Offer accepted vs. In Escrow - An offer can be accepted between the buyer and seller, but that often entails it's still far from being a sure thing. Once the buyer and seller have agreed on price and terms, then the real work begins, because that's when the buyer must verify the seller's financials and income. The standard time allotted to a buyer for due diligence can be between 10-14 days, and during that time, the buyer must fully satisfy themselves the business is doing what the seller has previously disclosed. If a broker tells a potential seller, "We currently have an accepted offer.", and it's not yet in escrow, then I would recommend the buyer to write a back-up offer because there is a good chance something might happen. As a buyer, if I found out a previous buyer backed out during the due diligence period, I'd probably be extra cautious, and inquire why that happened, did they see something I don't?
2. Removal of contingencies - When contemplating about writing a back-up offer, and the business is in escrow, one should ask where exactly the first position deal is in the process. If the business has a liquor license, has the posting gone up in the window, and is the application working its way through the ABC process? Has the lease assignment been approved by the landlord? If the buyer who is in escrow needed to get a loan, has it been approved? Once the due diligence process is done, and the contract goes to escrow, and the lease is going to be assigned, then the probability that the deal will be completed increases. If the contract just went into escrow, then of course, the likely that something could happen, and a back-up offer could slide in its place is more realistic.
3. Ask, are there any other back-up offers? - A potential buyer should ask how many other back-up offers are there. The broker shouldn't disclose the terms of the other offers, because they have a fiduciary reasonability to the seller if they also represent them, but they probably can tell you where your back-up offer stands amongst other back-up offers, either 1st position, 2nd, etc. If there are multiple offers and the original deal goes sideways, then the broker will usually present all offers at the same time, so don't be too discouraged if you are writing the third in position because you may have the strongest offer, and chosen by the seller.