How to sell a small business
Writing the all-important selling memorandum
The buyer generally is given the selling memorandum after they sign a confidentiality agreement, but prior to them meeting with you at your place of business. It should only be given to qualified buyers since it contains confidential information.
A good selling memorandum must do two (often conflicting) tasks: it must present completely factual information while at the same time creating marketing excitement. Spend the time needed to put together an excellent selling book – it will pay off many times over. If you utilize a business broker, they often will prepare the selling book (with a lot of input and guidance from you). If you don’t utilize a business broker, your attorney or CPA firm may prepare a selling book. The Business Sale Center also provides the service of writing and preparing selling memoranda. Click here for details about selling memoranda writing service and other Business Sale Center services.
It is important to "sell" in the selling memorandum, but also do not mislead buyers. Buyers aren’t as afraid of risk as they are afraid of the unknown. Hiding the truth or using the selling memorandum to mislead will almost certainly come back to haunt you later in the sale process.
As the outline below shows, the selling book may contain a lot of information. Try to keep it as short as possible and avoid flowery language and technical jargon. Use conversational language and be brief and to-the-point. Include equipment lists, etc. in an Appendix rather than in the middle of the document. Don’t lose the buyer’s attention by dwelling on trivia.
Here is an outline that can be followed, although not all of the information needs to be included in all cases. Choose the information most important for your specific industry and situation.
Part 1. Introduction and Summary: A one summary plus highlighting of the most important points the buyer should know.
Part 2. Description of Company: Form of ownership (corporation, partnership, etc.), reason for sale (very important), brief history of company, overview of product lines with percentage sales of each line, and the key success factors for the company – i.e. why is the company successful? (lowest prices, best service, most innovative products, etc.)
Part 3. Offering Price and Terms: Are you selling stock or assets? What is the asking price? What are the terms? How was the price arrived at (for example: 4X earnings)? Caution – don’t high-ball the price too much. While you want to leave a little room to negotiate, listing a price 50% higher than you are really willing to take will turn off buyers.
Part 4. About the Industry, Products and Customers: Describe the industry and current trends. Is the industry growing? What is the company’s market share, if you know it? Describe major customers – don’t name names, just describe types (example: our customers include major discount stores). Describe how your offerings fit in with the industry and who the major competitors are.
For products, describe each product line and it’s importance to sales and profits. Discuss patents, trademarks and royalty arrangements. Outline the channels of distribution and how products are marketed. Be sure to talk about any new products recently introduced or in the works.
Part 5. Personnel and Management: Start with an organizational chart, and also describe key management, the marketing/sales organization, and other human resources of the company. Include a three-year trend of the workforce (broken down by function) and discuss any relationship or problems with organized labor.
Part 6. Buildings and Equipment: For each long-term asset, include a description, age, condition, location and fair market value. If appropriate, include photos, drawings and/or information from appraisals.
Part 7. Long-term Plan: Detail the 5-year goals for the company, and the strategies and resources required to reach those goals. Be realistic but optimistic, and specify key assumptions made.
Part 8. Financial Information: Summarize three years of financial statements, with quarterly breakdowns of sales and expenses if possible. If sales are seasonal, provide sales by month for a three-year period. Also include recast financials for the same period, and be sure to explain the logic for adjustments made. This is the section to include projections, for at least three (and better yet five) years. Be realistic (but optimistic) in all projections – include expected wage increases, etc.
Part 9. Appendix: This is the section to put product literature, detailed asset lists, appraisals, photos, maps and drawings and anything else that would disrupt the reading flow if it was in the body of the book. The selling memorandum probably will not include copies of actual financial statements; those can wait until later as long as the summaries in Part 8 provided sufficient information.
About the author: James Laabs is an experienced business seller and author of the book The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing) Click here to find out how to buy the book.
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Qualifying Buyers: Separating the minnows and sharks from the keepers
You’ve run some intriguing ads that don’t divulge your business name or specific product line (or even your location, unless you are looking for a local buyer). And you’ve gotten a good number of replies from your ad – now what?
The next step is to qualify buyers. You’ll find that your ads attract sharks (who are looking for weak businesses to prey upon and buy at a bargain price), minnows (little in the sense of having little money to invest) and keepers (legitimate prospective buyers).
These are the specific categories that replies fall into:
Wannabes – Typically have little or no money or business management experience.
Bottom fishers – Wannabes or savvy business people only looking for a business they can buy at a fire sale, bargain basement price.
Curiosity seekers – People in the industry who are trying to figure out who is selling. These might be competitors, suppliers, employees or customers.
Brokers and sellers of other services – An ad may bring some responses from people trying to sell you something.
Sharks – May be legitimate buyers, but many are looking for weakness and a quick, low buck deal. Sharks are like bottom fishers but more cunning.
So far, things look pretty bleak. These aren’t very good prospects! Here are some better prospects you’ll find in your replies:
Business buyers – Companies who are looking for strategic acquisitions.
Investors – Individuals or groups with money to invest in buying a business. These are financial buyers and will often hire a professional manager (possibly the former owner) to run the operation.
Career changers – Individuals, usually middle-aged, who have experienced success and built up some savings but are disenchanted with their current job and want to be their own boss. These aren't “wannabes” if they have enough experience to have a shot at successfully running your business and the money to buy it.
Confidentiality Agreement and Background Statement
Obviously, you will discard the replies from people trying to sell you something. Also, anyone that you recognize as a member of your industry should be set aside for individual consideration on a case-by-case basis. But the rest of the replies should receive a Confidentiality Agreement to sign.
A Confidentiality Agreement is a contract in which the buyer agrees to be very careful with any information you provide to them. It is a legal agreement and it’s a good idea to have your attorney review whatever agreement you choose to send out. The Business Sale Center manual contains several samples of Confidentiality Agreements and cover letters.
Nearly as important as the Confidentiality Agreement is the background statement you should ask prospective buyers to provide. In response to their reply to your ad, you should fax a Confidentiality Agreement form along with a short cover letter. You should not divulge your company’s identity at this point. In the cover letter, thank the respondent for their interest and ask them to sign and return the Confidentiality Agreement. In the letter, also ask them to describe their background and the reason for interest in buying a business. Also qualify buyers financially by including a phrase such as: (1) "Please indicate if you have resources available to finance a business purchase of $ your asking price," or (2) "Please indicate the approximate size/purchase price of business you are seeking to acquire." Don't be too terse in your language – the idea isn’t to scare them away, but to get an idea of where they are coming from.
Not all of the people you respond to will return a signed Confidentiality Agreement, so you’ll eliminate some curiosity seekers right there.
You can learn quite a bit from the replies you receive. Look at the level of professionalism of the response – is the response typed or handwritten? Is it on blank paper or letterhead? Carefully worded or written sloppily in a hurry? If it is a business, what is the name and location of the company? The background statement will often tell you much about the person’s experience, which is a big help in qualifying a buyer.
Worried About Unqualified Buyers? Use a Mini-Selling Memorandum First
After sifting through the Confidentiality Agreements and background statements, separate them into an A, B and C pile. The A replies are those that look like business buyers or investors. Put the ones that look like sharks and bottom fishers in the B pile. Also include the ones you’re unsure of – they might be A prospects but you’re uncertain – in the B pile. The C pile should be curiosity seekers, competitors, suppliers and those who are definitely wannabes. Use your best judgment but don’t dwell on this too long – there isn’t much information to go by, so you are bound to misjudge a couple of replies. If you’re really uncertain about a particular reply, call them up and chat to learn more about their background. If someone uses the opportunity to start drilling you with specific questions, say that you’re not comfortable providing that information yet, but a selling memorandum will be sent to them.
If you are concerned about releasing too much information to buyers who may not be qualified, you may first want to send a mini-selling memorandum to the A and B prospects. (The C pile replies get nothing.) This is a 2 or 3 page memo summarizing your business (including name, address and contact information). It should be an upbeat description of the company and its main business. Give sales and profit information in general terms (example: sales of approximately 5 million dollars last year with about $400,000 EBIT). If sales and/or profits are trending upward, be sure to mention this, and use a chart or graph if there is a multi-year trend that tells a good story. Also important is to state the form of the company (C or S Corporation, partnership, proprietorship) and the terms and approximate price you are asking. For example, “Current owner is asking $2 million with at least 50% payable in cash at closing.” If your company is a C-Corporation, indicate whether you are seeking a stock or asset sale.
Stating the price and terms is important – it will go a long way in eliminating many of the bottom fishers and the wannabes that slipped up from the C pile into the B pile by mistake.
Note: Many sellers prefer to skip the mini-memorandum and just send out the standard one on the first go-round. If you're not overly concerned about releasing data about your firm, it's OK to do that.
Follow-Up With the Big Selling Memorandum
In a cover letter with the mini-selling memorandum, ask buyers to call or fax you if they want more detailed information. If you don’t hear from them within a week, call those who didn’t respond. Try to get their honest feedback – try to determine if there's a specific point that is spooking people. You will probably get a few bottom fishers who say your price is way out of line, and don’t worry about them. But if you get few replies from your mini-memorandum and a large percentage tell you that your price is much too high, reconsider your asking price.
Now, send the big selling memorandum to those who are left (it’s a good move to send your top prospects their books via air – it lets them know you’re serious). Again, include a cover letter asking them to call you within a week – one way or another, as a courtesy. Follow up by phone if you don't hear from them. Your Confidentiality Agreement should have specified that buyers return all information they received if they are not interested, but remind those who are no longer buyers that you want your selling books returned ASAP.
Hopefully, you now have a solid number of qualified buyers with selling memoranda. The next step is a Letter of Intent.
The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing)
© 2009 First American Publishing
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