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How Do I Sell My Business? Part II – Preparing The Documents

By Generational Equity

06/22/2016

This post is the second in our series designed to help business owners discover the key steps involved in successfully finding a buyer/investor. Earlier this week we looked at four risk areas that buyers focus on and provided ways to impact them, which would enhance the company’s valuation and sale-ability.

Today we look at a step that is often overlooked by sellers: creating key documents to protect the company and attract professional buyers. Both are equally critical. The key documents we are referring to include:

All three of these go hand in hand and are equivalently vital.

To begin, before sending detailed information about your company to any buyer, be sure to create an ironclad Confidentiality Agreement (CA). To be safe, it is a good idea to have an attorney draft this for you and if you can afford it, preferably an attorney who is well versed in M&A transactions. This point cannot be stressed too heavily.

You need to protect your business from unscrupulous competitors who would like to gain access to your company’s operating metrics and competitive strengths. If you send information to a buyer without getting a signed CA first, you open yourself and your business up to significant risks. Spend the money necessary and hire an attorney to create a solid, workable CA.

After the CA is created, your next task is to create an Offering Memorandum (OM). This is the document you will send to buyers after they sign and return your CA. What do you need to include in your OM? Depending on your business, some of these items will include:

  • Three years of historical financials
  • Five years of projected financials (based on recast numbers)
  • A full description of the company that should include a complete history of the business, its current operations, and future growth opportunities
  • A SWOT analysis on the business (strength, weakness, opportunities and threats)
  • An analysis of the projected growth of your industry
  • A discussion of the key end markets you serve and their projected growth
  • An examination of key clients
  • An analysis of vital suppliers
  • Full disclosure of significant contractual relationships with suppliers/customers
  • An organizational chart with a focus on critical employees and their relationship with the company
  • A full list of off-balance sheet assets that make the company unique and successful

Looking at this list of typical Offering Memorandum contents it is pretty clear that unless you are a trained accountant, you will most likely need help from a financial professional for some of this information.

For example, if you are unfamiliar with the recasting of financials, it will be vital to hire someone that is. Recasting allows you to restate the true profitability of your business. Most likely you and your accountant have worked hard over the years to help you personally retain as much of the company earnings as possible. Typically this means that the company’s true profitability is most likely much higher than what your historic financials portray. If you don’t make the effort to recast your historical financials, odds are good that you will be undervaluing your business.

The Valuable Features

In addition, one of the key areas of the OM that you will need to address is identifying those features of the business that make it unique; we call these Intangible Assets (a.k.a. off-balance sheet assets) because they are not necessarily accounted for directly in your earnings but they play a HUGE role in the company’s success.

Often this is a challenge for many business owners. Usually the entrepreneur is so close to the daily operations of the company that he/she does not have the ability to objectively view the business as a buyer would. Taking the time to truly catalog what makes your business distinctive is critical for the creation of your offering memorandum.

One thing to NEVER mention in your OM is the price of the business. There is an old saying: “He who mentions price first loses.” This applies to the sale of your company. Let the buyer(s) tell you what it is worth after they review your OM and spend some time learning about the business.

The final document you will need to create is the Confidential Business Profile (CBP) or teaser. This is a 1- to 2-page document that takes key information from the OM and “highlights” those items that you want a prospect to immediately be aware of regarding your opportunity. Typically you will want to show a summary of three years of historic revenue and earnings as well as your five-year forecast.

Also, be careful to not disclose too many specifics about your company’s location and any unique identifiers that might enable an industry insider to determine who you are. Provide just enough details to get them interested without breaching your confidentiality. This is a fine line to walk and you may need to create several different versions of your CBP depending on the types of buyers you will be approaching.

And again, never mention price in the Confidential Business Profile, AND do not send the Offering Memorandum even if someone expresses interest until they return your CA signed and dated!

If you take the time to carefully craft these three documents, you will be in much better shape to attract the attention of professional buyers to your opportunity. If you would like to see some actual samples of these documents, attend a complimentary Generational Equity M&A seminar. We conduct these throughout North America and odds are good that we will be near you soon. To find out more about our services, please visit our website, provide us with your contact information, and we will be in touch.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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