What You Need to Know
What is a selling memorandum and why should we use one?
A selling memorandum is a detailed description of your business that you can provide to prospective purchasers. The purpose of the memorandum is to inspire interest from prospective buyers, as well as to anticipate some of the questions they may want answered. The memorandum outlines the history, products and services, assets, and market and financial performance of your business, and it includes your reason for selling and your asking price. The memorandum should also include a detailed business plan for the next few years and the likely outcomes of that plan.
Should I hire a business broker?
If you do not have time to market your business yourself and you want to be proactive about the process, then a business broker may be able to help you. He or she will research the market for prospective purchasers of your business and help you make contacts with interested parties. The broker will arrange the signing of confidentiality agreements, hold preliminary discussions with interested parties, and help you decide which prospective buyers are worth pursuing, leaving you with more time to run the business.
How do I keep the selling process confidential?
When you advertise your business in a newspaper or magazine, or on the Internet, don’t mention your business name. Simply describe the industry or type of business you are in, your turnover and your asking price, as well as your location by general region (but do not give the exact town or city). Invite interested parties to respond to a P.O. Box or email address. Before you provide any information not publicly available, have interested parties sign a confidentiality agreement.
What to Do
Take the Time to Prepare the Business for the Sale
You can enhance the selling price of your business by taking some measures to increase its value. These can include:
- reducing discretionary expenditure (for example, travel and entertainment)
- reducing business costs without cutting back on vital areas (buyers will look for consistent spending patterns and sales figures)
- making sure that any property and equipment are well maintained
- reducing excess stock levels to improve the level of working capital.
Decide What Type of Buyer You Want
If you want cash from the sale, that may rule out buyers below a certain size. If you’re looking for a friendly purchaser who will continue to employ your staff, then avoid known “asset strippers,” those who acquire a company and sell its assets for a profit without regard for the acquired company’s future business success. You may prefer a buyer who is already in your industry, but remember that newcomers may pay a premium to enter the market. Together with your professional advisers, assemble your target list of potential buyers, and keep the list to manageable proportions.
Prepare and Distribute Your Selling Memorandum
Working with your accountant, business broker, and other advisers, prepare your selling memorandum. You may want to prepare two versions:
- a summary of main points to send to your target list of potential buyers and
- a more comprehensive document to send to those who express serious interest in your business.
Ask those more serious buyers to sign a confidentiality agreement before you give them your more comprehensive selling memorandum. Make sure the confidentiality agreement is written by a professional. Ask the recipients of the letter to sign and return it to you with two weeks—the promptness of their responses will indicate their level of interest.
Select Qualified Buyers
Once you have narrowed your list of prospective buyers, identify those who want to add to their own business profiles, as they are generally the most likely to put in a serious offer. These buyers will often be players already in your industry, so they will understand how your business would contribute to their own and the financial benefits they could derive. As you continue to narrow the list of prospects, remember that you must establish whether an interested party has the financing necessary to purchase your business.
What to Avoid
You Release Too Much Information
One of the dangers of putting your business up for sale is that it presents your competitors with an opportunity to gain access to sensitive information about your business that could help them compete against you. If you hire a business broker, he or she can advise you on whether your competitors’ expressed interest in your business is genuine, and will also maintain your anonymity, right up to the stage of narrowing down to a few genuinely interested parties.
You Spend Too Much Time with Time-wasters
There are bound to be a number of responses to your advertisements that simply do not warrant following up. Identify these as early as possible so you can focus on serious potential buyers with the financing needed to make a reasonable offer. One way to evaluate potential buyers is to carry out a credit check.
Where to Learn More
Books:
Nottonson, Ira.
Rickertsen, Rick and Robert E. Gunther.
Steingold, Fred S.
