Selling a business: the sales memorandum

By Terry Irwin |
Categories: Exiting
Tagged With: , ,

In earlier posts I offered advice on the various methods of valuing a business for sale, the steps you can take to maximise the value of your business, and the process of selling a business. For my final post in this series, I’m going to describe the various elements you need to include in the sales memorandum that you supply to your prospective purchaser.

This document should give the buyer enough information to enable them to decide whether to arrange a meeting with you and make you an offer for your company. It should not give away the essence or intellectual property of how you run your business. However, it should enable the buyer to assess the position of your business in relation to the points set out in my post of 26 October, How to maximise the value of your business.

Contents of the sales memorandum

The contents of a sales memorandum typically include the following items.

1. Key points

This part is normally a one-page summary of the business: what it does, staffing, premises, turnover and profit. Its purpose is to generate interest in your business, but it contains no direct information that will identify your business.

2. Business overview

This provides the buyer with a brief history of the business, its successes, the reasons why it makes a good investment, and what is included in the sale.

3. Products and services

Much like your own marketing material and website, this section details the services that your company provides and the benefits to the end customer. It shows why it is a viable ongoing business.

4. Staff and management structure

Buyers will wish to know about your staff: the basis of their employment (permanent or contract, full or part time) and their qualifications, experience and time served. This section will therefore contain a summary of this information, and will also explain the business owner’s role in the business.

5. Location and premises

The required information is:

  • rent: £X per year
  • rates: £X per year
  • duration of lease/tenure: X years, with Y years still to run
  • date of next rent review:
  • area/size: X m2
  • number of desks: X.

6. Financial performance

This is the most important section as far as your buyer is concerned. It is not customary to give buyers access to the accounts until they have met with the business vendor. However, this section will show the buyer the headline figures for the last three to four years, i.e.:

  • turnover
  • gross profit
  • adjusted net earnings.

The net profit shown in your accounts is not necessarily a true reflection of the earnings that a buyer could extract from the business. It is therefore advisable to calculate and show a figure for adjusted net earnings. This will depend on the type of buyer, as explained in my post of 22 October, How to value your business for sale, under the heading “Multiple of earnings value”.

First, the net profit is adjusted to show the potential earnings for a financial buyer. The adjusted figure reflects the owner’s takings and benefits less the cost to the new buyer of employing a replacement general manager. The cost of bank interest and depreciation is also removed from the overheads, as this can also be considered as additional profit potential for the buyer.

The net profit is then further adjusted to show the potential earnings for the strategic buyer, taking account of the savings from which a strategic buyer could reasonably benefit. This can include costs of premises, insurance, industry membership subs, advertising, IT costs, staff, accounting and legal.

It is also recommended to provide the following information to prove the ongoing strength of the business:

  • forecast revenue for the following year
  • revenue split by client and product or service
  • revenue for the last three months to date compared with the same period last year.

7. Future developments and opportunities

You are selling the future earnings of your business to the buyer. This section therefore explains the various potential ways of growing and expanding the business. It may be helpful to consider what you would do if you were taking over the business.

8. Reasons for sale

Buyers will want to be assured that you are not wishing to sell the business for any hidden reason such as liabilities, large indemnity claims or serious risks to the business that only you would know about, and that you will not start up a similar business and take back your clients.

Retirement and emigration are usually deemed to be understandable and acceptable reasons for selling a business. If you intend to pursue other unrelated projects, it is advisable to explain what they are. A general desire for a change, while perhaps understandable, will raise suspicions if you don’t expand on it.

9. Basis for sale

For a larger business with a turnover of more than £500,000, it is generally advised to invite offers. For a smaller business, state the asking price and terms, for example:

  • £X for assets and goodwill plus stock
  • £X + net asset value for sale via share transfer.

Keys to a successful business sale

  • Present your business as an investment.
  • Make it clear how a buyer can make a return on their investment.

Are you planning to exit your business within the next one to five years? TCii has helped many clients to identify and/or implement exit strategies that will achieve the maximum return on their business within a target time frame. For tips on getting the best possible deal, email me or call me on 020 7099 2621.

If you missed my previous posts on this topic, catch up here:

How to value your business for sale

How to maximise the value of your business

The process of selling a business

Disclaimer:

This information was correct to the best of my knowledge and belief at the time it was posted. It is, however, written as a general guide, and is not intended to apply to specific circumstances. The content should not, therefore, be regarded as constituting legal advice and should not be relied on as such. Accordingly, I recommend that specific professional advice be sought before any action is taken.

 

 

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