Exit Strategies: Selling Your Business by Getting the Documentation Right

When you have been owning and managing your business for several years, you start to believe that all the necessary paperwork you need is at hand and ready to hand over to a potential investor or buyer.

Unfortunately we often meet business owners who are trying to sell their companies with inadequate, out of date, or simply wrong documentation.  If your documentation is shoddy or even worse full of errors or inconsistencies you will probably lose an eager buyer or have to reduce your selling price as you cannot explain the differences properly.

There are two sets of documentation, namely those created for the sale process and those to be used in the due diligence process.  For the sale process the documentation will include:

  1.  the ‘one pager’ or   ‘proposal or profile letter’ – this is the teaser or summary document created from the IM.
  2. the Information Memorandum (IM) or Offering Memorandum (OM) which is a set of documents designed to answer all questions a buyer may ask. For example it should contain details of:
  • the preferred sale structure, e.g. assets and goodwill or share transfer
  • which industry your business is involved in and how long you have been trading
  • key financial figures such as profit, cash flow, value of assets and total debts
  • similar financial figures for previous years and how they have changed
  • some future scenarios or a 3 year business plan showing opportunities for growth or profit improvement
  • number of employees, with job titles, and premises
  • this is not an exhaustive list, and can include specific information unique to your company (patents, IP, etc.) or industry (barriers to entry, structure)
  1.  A good Non-Disclosure Agreement (NDA) or Confidentiality Agreement (CA) this will protect your company’s confidential or proprietary information
  2.  An optional (but in my view necessary) document is the Sales Presentation, which is a great tool to deliver a face to face presentation of the opportunity, instead of a dry and factual IM.

The purpose of this set of documentation is to identify and find potential buyers and provide them with facts and figures so they can evaluate your business and make a great offer.  With these documents a seller will be able to attract national and international buyers and help eliminate time wasters or unscrupulous competitors who may try to steal clients or employees, and learn propriety information.

At this stage while this set of documents contains lots of information about the selling company, but it should not include company name, customers, pricing data, location, etc. – confidentiality is key.  The documents should be truthful and positive – good documentation will engage the potential buyer; poor or incorrect documentation will lose the sale.

This set of documentation may be prepared by the owner manager themselves.  It is much more common that these would be prepared by the owner manager working part time with an advisor for several reasons.  Even though the business owner may be getting exit ready, focus must be maintained on running the business during the sale process and assembling the next set of documentation necessary to have a successful due diligence and complete the sale.

The second set of documentation is to be used during the due diligence process, consisting of primary and secondary sourced data. All sellers must distinguish between the 2 sets of documents at this stage, namely:

  1. The Primary sources, those documents that have been prepared and reviewed by others and are usually ‘historical facts’.  Such documents include the statutory annual accounts, lease agreements, supplier contracts, employment agreements, shareholder agreements, etc.
  2. Secondary sources, derived or created documents.  These documents are prepared by the owner mangers or advisors during the business sale process – the objective is to summarise the business for the potential buyers and get to contract signatory quickly and painlessly. Such documents include spread sheets showing the past 3 years profit & loss with future projections, an analysis showing value of income by customer name and sector, recent management accounts, and of course the Sale and Purchase Agreement (SPA) prepared jointly with the buyer.

As with all the documents discussed your personal objectives should include presenting a true and honest description of the business, showing it positively to attract the maximum value during the due diligence process.  Certainly the collection of the primary source documents should start NOW, well in advance of the any IM preparation.  This is the relatively easy bit as these documents are probably filed away somewhere, often stored in archived files, but finding them may be the most difficult bit.

Any experienced owner manager or shareholder should be able to prepare this set of documents themselves for the business sale, in fact they must be actively involved as they have the originals and they have knowledge of historical changes.  However, as these documents are also input to the documentation used in the sale process, see my previous blog, and they should be consistent and accurate.  A good advisor will assist in the preparing these, reviewing them and preparing the new documents in such a way that any buyer and their advisors will understand them quickly.

For the majority of sales, it is recommended that all these documents should be put in place prior to beginning the sales process, even in draft format. Sometimes this is not possible; say the business is being sold very quickly before it runs out of cash, i.e. a fire sale!!

Nothing annoys a buyer and therefore puts the sale itself and your personal objectives at risk including reducing the sale price more than the inability to answer fairly simple questions correctly and quickly, or not being to supply key historical documents that confirm statements in the IM or SPA.

CMC has put a guide together to help business owners achieve their personal objectives and think about their exit strategy, download it from here https://www.cmc-partners.co.uk/blog/2014/10/28/white-paper-thinking-selling-business/

To discuss your personal objectives and how to prepare for your future exit or business sale and get everything in place, please contact us on 01844 319286 or complete the contact form below.


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