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How To Investigate Any Business Opportunity
sonal financial statement. A confidentiality agreement pledges that the buyer will not divulge any infor-
mation about the business to anyone other than immediate advisors.
A buyer should determine a range of value for the business. An appraisal of the business as is can be
used to establish a pricing floor. A pricing ceiling can be established by using an appraisal that capital-
izes projected future cash flows under new management.
A buyer should have access to all records needed to prepare an offer. If some information is lacking, the
buyer must make a decision to either discontinue the transaction or make an offer contingent on receiv-
ing and approving the withheld information. The nature and amount of withheld information determines
which course of action to take.
An offer may take the form of a purchase and sale agreement or a letter of intent. Purchase and sale
agreements are usually binding on the parties while a letter of intent is often non-binding. The latter is
more often used with larger businesses.
Regardless of which form of the agreement is used, it should contain the following:
·
Total price to be offered.
·
Components of the price (amount of security deposit and down payment, amount of bank debt,
amount of seller financed debt).
·
A list of all liabilities and assets that are being purchased. The minimum amount of accounts re-
ceivable to be collected and the maximum amount of accounts payable to be assumed may be
specified.
·
The operating condition of equipment at settlement.
·
The right to offset the purchase price in the amount of any undisclosed liabilities that come due
after settlement and in the amount of any variance in inventory from that stated in the agree-
ment.
·
A provision that the business will be able to pass all necessary inspections.
·
Warranties of clear and marketable title, validity and assumability of existing contracts if any, tax
liability limitations, legal liability limitations and other appropriate warranties.
·
A provision (where appropriate) to make the sale conditional on lease assignment, verification of
financial statements, transfer of licenses, obtaining financing or other provisions.
·
A provision for any appropriate pro-rations such as rent, utilities, wages and prepaid expenses.
·
A non-competition covenant. This document is sometimes part of the purchase and sale agree-