EASE OF PURCHASE
Q. After 2 counter offers and 1 addendum, and 2 price reductions, we have finally come to terms with the seller on a home we want to buy. On the final addendum, the seller said we are now purchasing “as is”. We intended the seller to pay for termite work, thinking the reductions in price were for other items in the home that needed fixing. Doesn’t the seller have to pay for termite work anyway since he agreed to it in the original agreement? T.Y. Rio Vista
A. Wow! Your agent has earned their money. The original contract sets down terms for sale, the price to be paid, who fixes what, and who pays for certain items. When a counter offer is presented, that means any terms identified in the counter offer supercede the original contract. Those things identified in the counter offer now become part of the contract, but the numbers and terms on the counter are now the new contract amounts.
Usually an addendum is used only on terms, and a seller who has given ground on price may want to present an addendum after a counter that has caused a reduction in price to clarify what they will and will not pay for at the new agreed price. In your case, the seller obviously feels that the price reductions go beyond what he is willing to pay, and now has drawn the line. Presenting an “as is” means what it implies, that the seller will spend no money to sell the home. If you need termite work done, now you will have to pay for it. Since the counter offers and the addendum override the original contract, the price you negotiated has revealed new terms. The question now is if you are getting a low enough price to fix what is needed and not end up paying more than the value of the home. Often it’s better to let the seller win that price negotiation and make enough to afford the repairs. Keep in mind that repairs could have cost overruns for unseen damage, and hammering the seller on price may come back to haunt you in repair costs.
Q. I want to purchase a retail business, but how should I approach the owner’s asking price? Is there a formula or price breakdown to assess the true value? M.A. Rio Vista
A. A retail store with stocked inventory for sale will break down to the following six categories: inventory, fixtures, leasehold improvements, covenant not to compete, goodwill, and real estate. The real estate should be separated from the business and assessed for its own value. Since most sellers want to package the price when real estate is involved, it is real easy to pay too much for the building.
Goodwill really has no value, it really becomes a gesture to identify how bad you want to buy out this seller, and can push up the price of the business beyond realistic value.
Your real interest is in tangibles like inventory, fixtures, and leasehold improvements. Take inventory; is it current, or does it need to be discounted? Also, inventory should only be valued at wholesale, and the seller should be able to provide an inventory list with invoices.
Fixtures need to be priced based on age and functional capability. In some cases, replacement cost would apply if the fixture is specific to the business.
Leasehold improvements would include all those things done to create the theme and character of the store, giving it the identity for customer attraction.
The last thing to value would be the covenant not to compete; do you care if this seller opens across the street from you? If so, then this item could be important enough to give a value. What is not addressed here are owner financials for revue, work in progress, accounts receivable, vendors owed, and the cost of a new lease if the space is rented.
Your approach should include two and five year business plans/goals to determine your profit after servicing the purchase debt.
Just a note from the Small Business Administration: the majority of small business fails in the first two years due to lack of planning and improper funding. Good luck.
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