Making an Offer, Due Diligence, and Contingencies Explained
What is an Offer?
An offer to purchase is just that –an offer to the seller to buy their practice with terms, conditions, and contingencies you have specified. If the offer is not accepted within the time limit you set, your offer is void. Most offers are contingent offers—that is they become void unless certain things happen or certain conditions are met. All offers are subject to your price and terms being accepted by the seller and your contingencies being removed during due diligence (your investigation period). If the seller does not accept your offer they will either write a counter offer or reject the offer.
Some Typical Contingencies are:
The Financial Review, Inspection, a.k.a. Due Diligence
The financial review is a critical part of the due diligence process where the buyer verifies the seller’s claims about the practice and confirms the details about the financial and operational performance of the company. The financial review need not be overly complicated, but the process is important and frequently generates questions from buyers and sellers. Some typical questions from buyers are:
1. What is the Financial Review, Inspection, or Due Diligence?
This is the buyer’s opportunity to inspect the books and records of the practice and verify the seller’s information and claims about the practice. The buyer may also have additional questions for the seller and may wish to see additional details about the business operations or financials. If the buyer is satisfied with the results of inspection and review, they release the financial review contingency and proceed to the next step in the purchase of the practice.
2. How long does it take?
This is up to the buyer, but it must be a reasonable period of time normally 10 days. Many practices can be checked in less time, while more complex practices may take much longer and require a more comprehensive review.
3. What if the records are unacceptable or do not agree with the seller’s claims?
The contingencies in the offer must be met in order to proceed to closing. If not, the buyer has the right to make a different offer, cancel the offer and receive a refund of their earnest money and look at other practices.
4. Why not do the financial review before making an offer?
Buyers sometimes ask to perform a detailed financial audit before making an offer. Later they may find that the audit didn’t replace the need to be comfortable with the practice and be truly interested in it. They wasted a lot of time analyzing the books, only to find that they couldn’t agree with the seller on price and terms, or that the type of practice just didn’t suit them regardless of the financials.
First Choice Practice Sales developed the financial review contingency as a compromise to bridge the gap between the buyer’s concerns and the seller’s needs. We understand the buyer’s need to verify the books before buying the practice. We also know that it could damage the seller to have confidential information released to strangers or potential competitors. By using the financial review contingency, a buyer can make an offer in perfect safety and the seller is assured that they are dealing with a serious party.
Contingencies give you flexibility to negotiate and agree on a deal first
Contingencies give you the flexibility to negotiate price and terms with the seller, without being obligated to complete the sale unless certain facts are confirmed and specific requests are met after the offer is made and accepted.
For example, most offers are contingent upon financial review. If your review of the financial records turned up something inconsistent with the contingencies in the offer, you would not be obligated to proceed with the sale and your earnest money (deposit) would be returned. Likewise, many offers are contingent on obtaining assignment of the lease, specific licenses being obtained, or lender approval.
If a contingency cannot be removed due to issues found during the due diligence, you have complete freedom to:
Earnest Money/Deposit Money
Earnest money is evidence of a buyer’s serious intentions when making an offer on a practice. In return, the seller takes the business off the market while the buyer removes the contingencies in the offer. If any of the contingencies are not removed, the earnest money is returned to the buyer. Earnest money demonstrates to the seller that you are a serious buyer.