What Goes Into the Confidential Memo?

One of the key materials used in the business sale process is the confidential memo or book, which is essential if an owner is considering a sale of the business. Even if you are considering a sale in the future, it is good to have a basic book ready in case an unsolicited buyer comes calling. Also, preparing a book in advance can help the owner understand the highlights and issues with the business. It shows the buyer that the owner has put some thought and effort into the process and is serious about selling.

If the owner is truly ready to sell, it is best to engage the services of an M&A professional to help with the process. The advisor will prepare a book that is focused on the particular business. Every business is different, so every book is different, and M&A experience is key in determining how to prepare it.

Typically, a book is 30–50 pages, although today, most firms prepare PowerPoint presentations rather than Word documents. We almost never print out and mail books anymore. Including a corporate video can be very helpful in describing the business and introducing the owner/management team. If you produce a video, make it a two-minute, professionally edited video; don’t shoot it by yourself on an iPhone 3. You can, and should, use it on your website and corporate profile but edited a little differently. If the owner is not willing to get a professional shoot, use pictures (again, not using your old flip phone).

Here is a list of items to include in a book. The order can be changed somewhat depending on the nature of the business and what you want your focus to be.

• Disclaimer statement: Be sure to include a disclaimer statement that has been reviewed by your attorney.
• Highlights: Promote the highlights of the business. Don’t hide the issues (i.e., both the pros and cons), as these can be areas of opportunity. For example, many small businesses do not have extensive sales networks or marketing budgets.
• Opportunities: What could a buyer do with the business? We often hear, “If I was 20 years younger, I would do X,” which is a good place to start. Don’t over-hype the business; for example, don’t say the market potential is $1 billion if sales have been at the $5 million level for 20 years.
• History, ownership, and reason for sale: Briefly state the history of the company, the ownership and percentages, and a coherent reason for sale.
• Business/products: What does the company do? What does it make, and/or what services does it provide?
• Markets: What markets does the company serve? Include information on the top 5–10 customers over the past few years, as buyers will want to know about customer concentration. Customer names would be good to show at this point.
• Competitors: Who are the major competitors in the business’s markets, and what is the company’s position?
• Technology: What technologies or processes does the company possess? Although the company may not have any patents, it may have trade secrets or proprietary methods of production.
• Facilities: Describe all facilities and provide a list of major equipment. Be sure to point out any new equipment over the past few years as well as mention any purchases that are planned in the next year.
• Management: Include 1–2 paragraphs about the owner and any key executives.
• Financials: The book should include at least three years of financial statements (e.g., balance sheets, income statements, cash flow statements) as well as the current year-to-date and at least two years of forecast. A list of major EBITDA add-backs and a summary of adjusted EBITDA should be included. Forecasts and add-backs should be reasonable since buyers will review these closely; if these are not reasonable, it can instantly blow the owner’s credibility.
• Others: A general statement that there are no legal or employee issues, pending bad debt, or other concerns is good to include.
• Contacts and next steps: It is good to include the suggested next steps, schedule, and a contact person.

This is not meant to be an exhaustive list, and the contents will change depending on the business and industry. The owner may want to keep some of the information out of the book, although it is a fine line between disclosing what a buyer needs to get interested and being too cautious. Even with an NDA, some information—such as trade secrets, security-clearance contracts, etc.—may be too sensitive to disclose at this stage. An owner may wish to include a statement that certain information will be disclosed at a later stage, such as during management meetings or in due diligence. An M&A advisor can determine what parts of the business to emphasis or explain better.

The book should be designed so that a buyer can generally come to a conclusion on whether to acquire the business or not as well as a good idea of the price, structure, and terms that the buyer can offer. The buyer may still have additional questions and a need to visit the facilities and meet the owners and management. Developing a well-written and descriptive book will help the owner to get buyers excited about the business, which can increase the value, answer many questions up front, and help the process go forward more smoothly.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. He is a registered representative of StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC—and securities transactions are conducted through it. StillPoint Capital is not affiliated with GP Ventures.