Private buyers
What is an Information Memorandum (IM)?
An Information Memorandum is the formal document produced by the seller’s advisers which conveys a large amount of information about the business for sale. It is typically a lengthy document, often between 10-20 pages and covers information about the business including: history; profit and loss/balance sheet; current Directors/owners – their age, respective shareholding and role in the company; customer and supplier summary (anonymous at this stage); details of the trading address and premises; web address; reasons for sale; opportunities for the buyer to develop the business post acquisition; information about any uniqueness such as IP/patents and any trade marks, etc. The idea of the IM is to give the buyer sufficient information to enable them to decide whether the business is one worth progressing to a meeting with the sellers. Naturally, there will be additional information required over and above that contained within the IM such as monthly management accounts in the current trading year, but the IM will at least give the buyer all that is available for initial review and assessment.
Summary of profit and ebitda figures
Once in receipt of the IM, you will need to assess the information carefully. In particular, the summary of profit along with the adjustments to profit to derive ebitda will be really important in making an initial assessment of value and therefore, what you are likely to need in the way of external funding, alongside your own private capital. You can get a very quick sense of whether the adjustments to profit make sense and seem reasonable.
Customers and suppliers
The IM is unlikely to give any sensitive information away in respect of the customers and suppliers but it will normally give you a list of the top 10 customers by percentage of turnover and also possibly by sector. You want to get a sense that no one customer (or even a small number of customers) contribute more than 60% of turnover otherwise, this goes to a possible issue with customer concentration which funders do not like.
The same can be said of suppliers although this is less of an issue for funders. A concentration in suppliers could lead to cost of purchases issues. For example, if the business is too reliant on one supplier, then they are at risk of being held to ransom on purchase prices which, if increasing, also increases overall costs in the profit and loss and negatively affects bottom line profits.
Directors
The main pieces of information concerning the Director(s) are around their respective role(s) and age.
Regarding the roles, this will indicate to you the skills and areas of expertise you might need to replace on the current owner’s departure. If the Director(s) are carrying out a critical function in the business or some specialist/technical skill, then this will need to be replaced and the considerations around replacement will be very important vis-a-vis recruitment and the availability of staff in the labour market to enable this skill to be replaced.
Age gives an indication about motivations for sale, particularly if over traditional retirement age of 55. A true retirement sale would hopefully mean that the seller’s price expectations might be reasonable and in line with the commercial market, rather than a situation for a pre-retirement aged Director who might be “having a punt” to see if a higher than market value price might be achieved. Often, if the Directors don’t have a true driver for sale such as retirement or ill health, this can mean that they will hold out for an unrealistic price and won’t entertain a sensible, commercial valuation for the business.
Balance sheet summary
The balance sheet is a snapshot of the assets and liabilities of a business at a given point in time (the financial year end). It will indicate the strength of the business and will detail the different assets, both fixed and current which might have potential to leverage some debt when considering funding options. Land and buildings, plant and machinery, stocks and debtors all have potential value when it comes to a funder who offers an asset based lending (ABL) facility. The cash balance contained within the current assets is normally regarded as being part of the outgoing owners assets on completion. An element of this should be reserved as working capital which will be required to pay the immediate debts of the business for the first 3 months or so of the new owners’ tenure and this is calculated by the accountants/corporate financiers towards completion date. The cash balance less the retained working capital element is referred to as free cash and is effectively undrawn dividends for the original owners which have accumulated over the years of trading.