Buying a Business

4. Making an Initial Offer

4.1 Take professional advice to help you value the target business.

• Make your own profit projections. Do not rely on the vendor's figures.For example, question claims that the gross margin is going to increase.
• Identify where savings can be made, and where there is scope to increase profits.For example, can your existing business also grow by selling to the target business' customers?

4.2 Consider your level of risk.

Risk is higher if the target business:

• Has assets worth less than your offer price.
• Relies on one or two major customers (or contracts, or suppliers, or key employees).
• Is currently unprofitable, or has a history of losses.You may have to fund losses for some time to come.

4.3 Calculate your initial offer and your maximum offer.

Take into account:

• Your initial valuation.
• What competition you are up against.
• The vendor's objectives.Assess what you are prepared to pay and be able to articulate why. Be prepared to the basis for your offer if necessary.

4.4 Submit your offer.

• Use a concise, formal letter. Head it 'SUBJECT TO CONTRACT', so that you are not committed.
• Detail the specifics of what you are prepared to pay and what you'll expect to receive for it.
• Emphasise the positive points of the offer.For example, that you can pay in cash or that all the employees will be kept on.

4.5 Chase up the offer.

• Clarify any outstanding issues.
• Listen carefully to feedback on your offer and be prepared to revise terms if necessary.