A Basic Primer on Selling a Business: What kinds of information will buyers of a business want to see?

It’s always a fairly daunting moment when one first sits down to start planning and preparation on what contracts, documents and information need to be assembled for a review by a buyer, in order to sell a business. The amount of material always seems potentially gigantic, a lot of it may need updating, the people involved in the project (usually the management team in the business, and perhaps some of their direct reports) already have a full-time day job to do, with the business sale process as an additional time-consuming project—and generally the planning, preparation and document assembly need to be done confidentially, so as to not to generate rumours or concerns in the business. The task seems huge, and the resources seem stretched…always!

The good news is that like any big project, it can be broken down into achievable pieces with responsibilities timetabled and assigned across a team. When it comes to thinking about what information needs to be assembled, the typical thing is to work through each functional area of business management (eg Finance, Sales, Marketing, Legal, HR, IT, Technology, Operations, Sourcing/Procurement, Facilities). Different businesses have different management organisations and labels for these activities, depending on what the business actually does. But the starting point is to think through the different areas of business operations, and what contracts, documents and presentation content can get across to a buyer how things work. One can think of this as “bottom-up” thinking about what key aspects of operations need to be communicated to explain each functional area of business operations.

In parallel, it is also important to think carefully “from the top down” about what you want your few key short messages to be about why the business is an attractive one. Potential buyers are going to have to work through large volumes of information and sellers need to provide it and help them progress through it efficiently, but as a seller one also wants to help them digest it all and get to the “right” high-level insights or conclusions. So in a well prepared process, in addition to thinking about what contracts, documents and information will be required and how to assemble them, one also thinks carefully about what key insights you want to help bidders get to. One way of approaching this, especially if one is working with an outside adviser or broker to sell the business, is to work up a bullet point list of the key attractive features of the business (examples could be things like: key strength in R&D and product innovation, leading to premium products and pricing; a history of growing market share in a growing industry, with strong sales growth ahead; or, a carefully designed, remunerated and educated sales force, with long-standing customer relationships and high customer loyalty.) The key messages of this “elevator speech” should get reinforced repeatedly throughout the process: the documents and contracts made available should support them, and they should be repeated in management presentations and in any information memorandum provided to bidders. The overall task is both to communicate a lot of information, and also to help buyers to be able to sift through that information to accurately distil it down to key features of the business–that ideally support a higher valuation!

This article is part of our multi-part series - A Basic Primer on Selling a Business. See the other parts of this series here.

So what information do buyers usually need to see in the latter stage of a business sale process? That varies according to the type of business of course, but the following is a general list of possible topics that may need to be addressed:

Finance

  • Organisation chart, including assignment of responsibilities
  • Audited annual financial statements going back 1 or more years, together with auditor engagement letters, and any auditor reports to the board of directors
    • Information on any recent or pending changes to significant accounting policies, and a review of all important accounting policies
  • Specially-prepared, unaudited financial statements to report on business performance for the period since the last audited annual financials
  • Current and recent accounts receivable, accounts payable and inventory reports
  • Overview of internal financial reporting systems and processes
  • Summary of controllership processes and information on historical controllership failings
  • Explanation of the business’ budgeting processes together with some level of information on current short-term and longer-term budgets
  • Historical income tax returns, together with relevant information on any tax audits, assessments or appeals, possibly with any related important correspondence
  • Information on employee payroll tax withholding
  • Information on any customs & excise tax arising in operations
  • Materials summarising any intra-group operating model (for charging HQ service costs and defining what revenues and expenses get recognised in what companies in the corporate group)
  • Recent internal management account reports on business targets and performance by region or business unit, including a guide to definitions and rationale for key internal business performance metrics
  • Details of any recent or current special projects, such as cost-reduction initiatives to increase margins, updates to performance metrics or targets, Finance department projects to improve reporting processes
  • Overview of process for subsidiaries to certify periodic financial reporting to HQ Finance function
  • Overview of any Risk management framework and process within the business (often a joint effort of the Finance and Legal function, with other departments)
  • Organisation chart, including assignment of responsibilities
  • Corporate ownership chart, showing ownership relationships
  • Corporate documents for all companies, together with detailed shareholding information and records on granting of any employee stock awards, options or warrants, plus any shareholder agreements and or voting agreements
  • Lists of company directors and officers
  • Contracts for any debt financing or credit facilities, including any key correspondence with lenders
  • Listing and description of all intellectual property (patents, trademarks, copyright or other) and summary of duration of current registrations by country, together with relevant documents on any intellectual property disputes or claims, or any important inward or outward-bound licensing of intellectual property
  • Listing of company owned internet domain names and registration status, together with information on any disputes
  • Customer contracting processes, policies and model documents
  • Supplier contracting processes, policies and model documents
  • Copy of the company’s compliance policy and written code of conduct, together with an overview of the compliance program overall and processes for employee education and policy certification
    • Details and reports from employee whistleblower or ombudsman channels
  • Copies of any governmental licenses, permits or consents
  • Any correspondence, citation, notice or documents relating to any proceedings of any regulatory agency
  • Any documents filed with any securities regulator
  • Any reports, correspondence or disputes with government entities and agencies
  • A list and summary of all recent, current, pending or threatened litigation

Technology

  • Organisation chart, including assignment of responsibilities
  • Summary of processes for protecting business know-how and trade secrets
  • Summary of R&D pipeline and pipeline management/toll-gate process, with review of recent and current important R&D projects
  • Overview of important proprietary technology or know-how, including strategy for future technology and IP development
  • Review of any key technology development partnering relationships, together with key legal agreements and status reports
  • Product quality: overview of applicable technical standards for products, testing and certification processes for technical standard compliance, and involvement in industry technical standards-setting

IT

  • Organisation chart, including assignment of responsibilities
  • Charts and overview of IT architecture
  • List of software used by the company and copies of any licensing agreements, including any proprietary or customised software or systems
  • Any important IT outsourcing agreements
  • Documents explaining IT processes including applications development, IT operations, disaster recovery, information security, budgeting and cost management
  • Information on information security and controls framework and processes, together with details of cybersecurity monitoring and incidents

Facilities

  • Organisation chart, including assignment of responsibilities
  • List of all owned or leased properties with key details (eg, location, rents, lease periods, etc.)
  • Copies of real estate deeds, appraisals, mortgages, leases, surveys, title policies, use permits and any other relevant documents
  • Copies of any violations, complaints or requests for information regarding environmental matters (from private parties or government authorities)
  • Permits and licenses relating to environmental matters such as underground storage tanks, air quality, water use, solid/liquid wastes and hazardous waste storage or disposal
  • Listing of hazardous substances used and any intentional or accidental spills/releases of hazardous materials
  • Details of any known or pending environmental clean-up liabilities

Operations

  • Organisation chart, including assignment of responsibilities
  • Schedule of owned and leased fixed assets, including description, date acquired, value, rent and location, including copies of key leases
  • Copies of any lease agreements for capital equipment, including any vehicles
  • Details on all sales and purchases of major capital equipment in recent years, together with any planned or pending purchases
  • Copies of any equipment appraisals
  • Overview of production volume and quality reporting, together with current reports and discussion of any issues or initiatives
  • Workplace safety and health programs: education and monitoring processes, together with safety incident reports and trends

Sales and Marketing

  • Organisation chart, including assignment of responsibilities
  • List of products and services offered and in development
  • Market research including addressable markets, share, trends, drivers, opportunities, threats, differentiators and outlook
  • Profiles of competitor landscape and key differentiators
  • Overview of sales channels and their respective profitability and volumes, together with future plans
  • Customer analysis including customer segments, demographics, churn rate, satisfaction, customer acquisition cost and lifetime value
  • Listing of customers (by volumes and sales) and copies of customer contracts
  • Overview of any distribution relationships or franchise partners, with copies of agreements with distributors, value-added resellers and dealers
  • Details of customer complaints or warranty claims over time

Sourcing/Procurement

  • Organisation chart, including assignment of responsibilities
  • List of major suppliers, by annual cost, and overview of supplier evolution in recent years
  • Copies of supplier contracts, together with key model contracts or contracting policies, including compliance and other policies in supplier contracting
  • Summary of current product-liability issues and related claims against suppliers, including potential impacts

Human Resources

  • Organisation chart, including assignment of responsibilities
  • Overview of compensation and benefit program, with employee demographics information (age, location, title, tenure, department, compensation, etc.), including details of incentive compensation and stock/option award mechanisms
  • Compensation benchmarking information and summary of relative compensation-setting strategy
  • Overview of employee regular performance review processes and goal-setting
  • Data on employee turnover by region and department, identifying trends and any initiatives
  • Copies of key employee policies, including on conduct in the workplace, benefits, grievance procedures and training
  • Overview of employment agreements, including non-disclosure, non-solicitation and non-compete terms as well as provisions ensuring the employer’s ownership of all intellectual property (copyright, inventions, know-how etc) developed by the employee
  • Copies of any collective agreements with unions, and timings and expectations for renewals
  • Information on any works councils or other legally-mandated employee representation procedures
  • Copies of any stock option or stock purchase plans
  • Details of pension and retirement plan benefits, including any pension deficit funding obligations
  • Overview of recruiting and onboarding processes for different levels of employee seniority
  • Overview of payroll processes and responsibilities, including any outsourced providers of payroll services
  • Summary of any key employee disputes or current, pending or threatened litigation

Even though this is a relatively short and generic list (keep in mind that so-called due diligence request lists can easily run to 50 pages of requests), it underlines the importance of the same overall message: selling a business involves communicating a very large amount of information, so careful planning and preparation are key.

In addition, as one looks through the list in each of the functional areas above, you can see requests for copies of contracts and legal documents throughout all of them. And in some cases the numbers of contracts involved can be huge. In each case, a potential buyer will want to review the existing agreements (or as many of them as possible) to understand the status quo today. And, in line with the buyer’s need to predict future business operations and develop a business forecast and valuation from that prediction, a potential buyer will be particularly interested in looking at what can happen in future under the terms of existing contracts (including things like whether any “surprise” liabilities could arise or whether a key relationship could be terminated by the other party on short notice).

Typically the goal for the buyer is to get access to as many contracts as possible in each of the functional areas of business management (Finance, Sales, Marketing, Technology, HR, Legal, Sourcing, IT, etc), since even a few words in one contract may have tremendously significant ramifications for the risk profile (and thus the value) of a business. For example, if a purchasing contract with a key supplier contains a change of control provision (for example, a clause allowing the supplier to give notice and terminate the supply contract if there is a change of ownership of the target business) then the impact on the operating economics of the business could be very significant (if, for example, the supplier provides a scarce input for which there are few substitutes of comparable quality). Or, in financial services businesses, one may find that a particular format of customer contract contains overly aggressive pricing clauses or inadequate disclosure of key liabilities and obligations, with the result that an entire book of customer contracts done using that format may be unenforceable…or even illegal and potentially subject to regulator enquiry and fines. The list of potential horror story scenarios is long. And it is not simply an academic matter: there are myriad examples of buyers radically over-paying for acquisitions because of unknown liabilities that were not caught and properly assessed during their due diligence work.

It’s also important to be aware of an important trend in how potential buyers of businesses are approaching the task of reviewing contracts–a trend that results from recent progress in contract review software (that uses machine-learning capabilities to help people search for specific things). Until the last few years, reviewing contracts has been something that only humans did. When doing its due diligence work on a potential acquisition target, a bidder would scope out the type and number of different contracts being made available for review and then decide on a) a practical and efficient strategy for reviewing each category of contracts, and b) which team members (with which areas of functional expertise (Legal, Finance, Technology, Sourcing, HR etc) should look at which categories of contracts (typically with at least two functional experts needing to look at any given category of contracts). The requirement for figuring out a strategy for reviewing each category of contract arose from the fact that some types of contracts may require less comprehensive review than others (if, for example, the risks in that type of contract were limited)…and also because sometimes the number of contracts can be really big! (Imagine buying a financial services business with 100,000 or a few million customer contracts (assets which are the core of the business and need close attention)). The cost and time involved in human review of every single contract in a particular category can often be prohibitive, and typically in such situations the “strategy” amounted to finding a way to review a carefully designed sample sub-set of the type of contracts in question (carefully designed to be manage-able given the time constraints and the labour-intensiveness of the contract review work being done only by humans working on their own). The important trend to be aware of is that now, with the development of effective and user-friendly AI software for contract review (that can both find common types of clauses and issues–and also be easily trained to look for very situation-specific types of clauses and issues), it is now possible for bidders to work much more efficiently (having human reviewers using AI software) and review huge categories of contracts in their entirety. No prizes for guessing what this means for sellers of businesses today: since technology allows more efficient, broader-scale and comprehensive review of contracts, a) bidders in business sale processes are increasingly inclined to seek access to all contracts in a category, and b) to be properly prepared, sellers need to undertake similar AI software-assisted contract pre-reviews when they do their pre-sale preparation work.


Continue reading our multi-part series:
A Basic Primer on Selling A Business