When you start thinking about selling your business, it would be helpful to keep in mind that most buyers will be looking at your business as an investment. The investment needs to provide a good return, and it must not be very risky. So most buyers want a clear picture of how much money the business nets, and how it operates. I am speaking from my own experience. For me as an investor, this is the starting point. When I am looking for a business to acquire, this is where I start my information gathering.
To help buyers assess the investment, you have to provide them initially with mainly two things: financial statements, and a narrative about the operations. For the financial statements, the primary source for the buyer is your Profit and Loss statement. Be prepared to provide the P&L for the current year to date and the last two full years. Also, have the current balance sheet ready. And if you produce cash flow statements, have those ready as well for the current year to date and the last two full years.
Be sure your financial records are accurate. If there are any discrepancies or inconsistencies, take the time to address them before presenting statements to potential buyers. In addition, you can adjust the financial statements to account for personal expenses that are not part of the business. Those changes are called add-backs. However, do not go overboard and take out all one-time event expenses. Whatever the buyer can reasonably expect to encounter in the upcoming year or two, leave it in the P&L Generally it is acceptable to would provide prospective buyers with a dual set of P&L: one is the actual Profit and Loss, and the other is the Profit and Loss with the add-backs.
In regards to narrative about the operations, this is a description of how the business operates. Describe in a short narrative the market area of the business (including geographic area, your industry niche and types of jobs you do best), how your team functions, who runs the business at the top level, and what are some areas of growth the buyer can focus on to increase revenues. For example, if you are in the cabinetry industry, do you actually manufacture, or do you source out and install instead? Are you the boss that people look to, or do you have a full time manager/CEO?
If you want to go a step further, you can create a general information memorandum (or “IM” as some people call it). The IM provides general business information before you disclose anything confidential. This general info includes:
- Business specific industry: eg: digital marketing, cabinetry manufacturing
- General location: city area: eg. eastern Houston area, or region of a state: eg: central Florida
- Revenue range: eg. $2MM to $3MM business
- Employee range: eg. 5 to 10 employees
- Description of the business, attractive advantages, whether it is established or newer, and any competitive advantages it offers
- Price for the business.
- Any willingness on your part and duration to train or support during a handover period.
As an additional note, buyers understand that some or all of the information you are providing is confidential. They know that a confidentiality and non-disclosure agreement may be required of them to receive specific detailed information, so you can ask for that to be put in place. You may want to have two sets of documents: One very general that does not identify the business or provide deep detail, and another set you deem requires a non-disclosure agreement. This is common practice I encountered and not legal advice of any kind.
In the next article, we can go over what price to set for your business.
