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How To Make Sure You Have The Right Buyer
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Writing the all-important selling memorandum
By James Laabs, The
Business
Sale Center
The
selling memorandum (sometimes called a “selling book”) sets the tone for the
entire sales process. It is not only the key to making a great first impression,
but buyers will refer to this document throughout the selling process. It is
your best chance to present your company in a most outstanding light. A selling
memorandum also saves you time and headaches by answering the questions buyers
commonly ask.
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.
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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.
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