Information briefs

An information brief (sometimes called an information memorandum, selling memorandum or business profile) is a document that sets the tone for the entire sales process. It is fundamental to making a positive first impression, as buyers will refer to this document throughout the selling process. It is the best way for the owner to present the business in its the clearest light. This document also saves the owner time and stress by answering commonly asked questions.

This information is generally given after the buyer has been screened and signed a confidentiality agreement, prior to all parties meeting at the place of business. It should only be given to screened potential buyers as it contains confidential information.

A good information brief must do two (often conflicting) tasks: it must present complete factual information while creating marketing opportunity. The owner should spend time to put together an exceptional brief – it will pay in the end.

If the owner uses a business broker, the information brief will often be prepared by them (with input and guidance from the owner). If the owner does not use a business broker, solicitor or accountants can also help in preparing a brief.

It is important for this information brief to highlight the business in the best possible light but not mislead buyers. Buyers are not afraid of risk, they are afraid of the unknown. Owners hiding the truth or using the brief to mislead will undermine the sale process.

An information brief will contain a lot of information. The owner should aim to keep it as short as possible (brief) and avoid complexity and technical jargon. The owner should use effective, straight-forward language and be to-the-point. Equipment lists, lease documents etcetera should be placed in an appendix. This will allow the buyer to focus on the business rather than the minute details.

Below is an outline of what is commonly put into an information brief, although not all of the information needs to be included in all cases. Choose the information most important for the specific industry and situation.

Section 1. Introduction and Summary: A short (usually bullet point) summary highlighting the most important points the buyer should know.

Section 2. Description of Company: The type of ownership (partnership, corporation, etc.), reason for sale, a brief history of the company, overview of operations, description of product lines with percentage sales, the key competitive advantages for the business – i.e. why is the company successful? (Examples are customer service, low prices, innovation, products, etc).

Section 3. Asking Price and Available Terms: Is the owner selling stock or assets, what is the asking price, are terms available, how was the asking price arrived at? The owner should realise caution and not inflate the price too much. While listing at high prices leaves room for negotiation, listing a price 50% higher than valuation will immediately turn the buyer to look elsewhere.

Section 4. Industry Overview, Product Lines and Customers: The brief should describe the industry and current trends. Is the industry growing? What is the company’s market share (if known). Describe the businesses major customers – naming them is not important, just the type (example: customers include major retail outlets). Describe how business offerings fit in with the industry and who the major competitors are.

Each product line should be described and it’s importance to sales and profits. Patents, trademarks and royalty arrangements should be discussed. Channels of distribution and how products are marketed should be outlined. New products or additions should also be discussed.

Section 5. Management and Staff: The brief should start with an organisational chart, describe key management and staff and the marketing/sales effort. Including trends of the workforce (broken down by function) and discuss any relationship or problems with organised labor.

Section 6. Plant and Equipment, Fixtures and Fittings: Each long-term asset should include a description, age, condition, location and fair market value. If appropriate, photos, drawings and/or information from appraisals should be included.

Section 7. Future Plans and Opportunities: Future goals for the business under the current owners leadership, the strategies and resources required to reach those goals should also be included. The owner should be realistic but optimistic, and specify key assumptions made clear.

Section 8. Financial Information: This should aim to include three years of financial statements, with breakdowns of sales and expenses (if possible). If sales are seasonal, provide sales by month. Also explain any adjustments made to the financials that affect the ongoing profitability of the business.

Section 9. Appendix: This is the section to put product literature, detailed asset lists, appraisals, photos, maps, drawings and any other extra information. The information brief will not include copies of actual financial statements; those can wait until later as long as the summaries in Section 8 provided sufficient information.

How to value a business?

Determining the value of the business is one of the most difficult things the owner will be required to do and the seller will be required to verify.

There are a number of reasons why a fair and accurate assessment of business worth is required, ranging from determining a selling price to raising investment capital.

Fair market value

The courts definition of “fair market value” is the price a willing but not anxious buyer, acting at arm’s length, with adequate information, would be prepared to pay to a willing but not anxious seller of the shares or assets in question.

This means that if all information on the asset in question is provided to an interested party and the seller is logical and forthright in the sale of their asset. The fair market price is the price agreed between both buyer and seller on that day.

The statement mentions that both the buyer and seller should not be anxious in relation to the sale of the asset. Implying that they should be logical and forthright when approaching this transaction. From the outset, it’s important to note that the business owner may be the least capable person of deciding how much the business is worth, as they may have personal and emotional ties to the asset in question that will not allow them to look at the transaction in a clear objective way.

Additional to this, there may also be buyers that are not acting objectively towards the transaction and may significantly under or over value the business. (Please note it is extremely rare to find a buyer that overvalues a transaction). The reality is that most of these types of buyers waste time and energy of the parties and their representatives involved. The best way to deal with this type of problem is to put a qualifying system in place that weeds out time wasters. Business brokers specialise in this type of service.

The term adequate information is used in the above statement. What is adequate information? In the case of business sales this may reflect historical and current financial information, current operations covering supply arrangements and customer arrangements, advertising etc… (for clearer understanding of what type of information is usually supplied please read the article in relation to business profiles).

When the owner or prospective purchaser is in an objective mindset and has reviewed all of the available information then they will be able to proceed to applying a valuation to the asset.

Intrinsic value

Initially it is important to determine the bottom value of the business. This is generally regarded as the current market replacement cost of all the plant and equipment and stock involved in generating income (intrinsic value). That is, if the business was to start again, would a new owner still have to purchase all of the stock, plant and equipment the business currently holds.

Goodwill

Goodwill is the component of price above the intrinsic value of the business. The next steps will help in determining if there is any goodwill value in addition to the intrinsic value associated with the asset. To do this the seller/buyer must consider risks associated with running the business. That is what are the risks associated with the business?

Risks

Risks include key employee risk (including owner/s), supply risks, customer risks, economic risks, technological risks, systematic risk, market risk and tenure risks. (There may be additional risks associated with the business not mentioned in this article.)

• Key employee risk – is risk associated with key staff members or owners. There are a number of components to this risk. The first is how much does the business rely on key personnel (including the owner)? Would it be difficult to replace them without detriment to the business? Can they easily be replaced at a fair market rate? Are they being paid the fair market rate now? Will any negative / positive answers to these questions affect the profitability of the business?

• Supply risks – is risk associated with supply arrangements. There are a number of components to this type of risk. What choice of suppliers are available? Are supplier terms transferable to the new owner? If they are not transferable will that increase working capital required? How will this affect the value?

• Customer risk – is risk associated with customers. There are a number of components to this type of risk. Are sales distributed evenly amongst the customers? What percentage of sales do the top 5 and top 10 customers hold? Do the biggest customers choose the business due to price, quality, customer service or convenience? If the business lost the two biggest customers would that significantly change the profitability of the business?

• Economic risks – is risk associated with the economy. There are a number of components to this risk. How effected is the business in relation to local, national or regional economic conditions? How likely are economic conditions to change? Will this effect the profitability of the business?

• Technological risk – will products or services offered be eliminated through technological innovation? If yes, when is this innovation likely to occur? Will technology help the business to grow? How technologically driven is the business? How technologically driven are the competitors? Does this require further investment into equipment and training? Will this affect the profits?

• Systematic risks – this risk is associated with the systems that the business currently employs. Are these systems affective? Are these systems easily transferable? How much of the business is systemised? How much requires executive decisions? Are there better systems available? How easy is it to learn these systems?

• Market risk – This is risk that is associated with the market the business operates in. The first thing to consider is where does the business conduct its operations? Manufacture, wholesale or retail. How many competitors are there in that market? Is there anything that differentiates the business from the competitors?

• Tenure risk – this is risk associated with continued tenure. Are the premises currently leased? How long is the lease guaranteed for? Is the business paying fair market rate? Will the business have to move premises soon? What are the additional costs associated with moving or creating a new lease or paying fair market rate? Will this affect the profitability of the business?

Once the risk set has been determined it is useful to look at the likelihood of these things changing in the immediate future. That is, what is the likelihood the business will become more or less risky in the coming years? Once all of these risks have been identified in respect to now and the immediate future the next step is to determine the profitability of the business.

Profitability

Different businesses are sold on different profitabilites. There are many measures of profitability some of which are Net profit, EBITDA, EBITD, EBIT, PEBITDA, PEBITD and PEBIT. (Please refer to the article in relation to definitions for further clarification of these terms). Each one of these terms attracts a slightly different valuation technique.

Rule of thumb method

One of the most widely used forms of business valuation is based on the rule of thumb method that determines value according to a standard for businesses in the same industry. Every industry has benchmarks that industry insiders use to gauge the value of the businesses. The problem is that the benchmarks are based on industry averages and don’t take into account the extenuating circumstances of any given business. So, while the “rule of thumb” method is good for ballparking the value of the business, the seller/buyer will need to rely on other methods to determine its final value.

Book value method

The next most popular method is the book value method. Book value of a business is based on the accounting records and is determined by subtracting the company’s liabilities from its assets. The result is the owner’s equity (book value). Adjustments are then made for things that aren’t reflected in the financial statements like intangible assets and market factors.

Earnings capitalization method

The earnings or income capitalization method is based on determining an annual rate of return necessary for taking on the risk of the investment. Most business owners would recognise this as some multiple of profits. This is an approach to determine the return an investor would wan to hold your asset in the market place when compared to other assets. The return is the inverse of the multiple. That is a 3 times multiple means a 33.33% return on investment. Rates of return vary according to the amount of risk involved. According to this method, the value of the business is determined by the size of the investment necessary to earn the required rate of return when it is compared against the business’ earnings.

The easiest way (but not necessarily the most accurate) to determine the capitalisation rate is to research other businesses for sale. Look as listings on the internet to get an idea. You can also approach a broker for an appraisal or enlist the services of a valuer to give you a more accurate price.

Business brokers and valuers have a historical database of past sales that they can compare the business too. They also have the expertise of the industry to determine what price is likely to be achieved for the business. They make adjustments to values in relation to the current market.

Other issues

Finally, the value of time has to be taken into consideration. How long does the owner want the business on the market for? There are many components to this question. The longer the business is on the market the more likely the owner will have to drop price to meet the market. It is not useful to set a high price for your business and reject prospective purchases only to have to approach them again at a later date. This can send them a signal that the business is less valuable and lead the buyer to a lower offer. If however, the business fits into a small minority and the appropriate price can only be achieved through a longer process then this approach should be used. This certainly might be the case if you have a large value business.

In summary the valuation must take into account the following:

• The time to sell the business.
• The risks associated with the business.
• Type of business.
• Historical and current information of the business.
• Likely future expectations of the business.

The Business Owners Negotiation Strategy:

Preparation

The business owner should prepare the business for sale, screen the buyers and prepare an information brief. The business owner should seek advice from professionals and know what the expectations are.

The business owner should keep in mind that they are never being forced to sell the business. While they may want a particular outcome, or may have a good reason to sell, no one is forcing the sale.

Good negotiators always have the attitude that they will be in a good position even if they do not close on a deal. This perpetuates the idea that you are selling a lucrative object.

Attitude

Buyers will react to the sellers’ demeanor in any negotiation. As a seller, always act reluctantly. When offered a price allow, the buyer to know that, as the business owner you will be considering your options. The business has a personal value to the business owner. Always allow the buyer to know that there are things to consider, however all reasonable offers are welcomed in all fairness. To minimise wasted time the business owner may ask (if not already done so in the screening process) can the potential buyer afford the asking price? If not the business owner may be wasting time even beginning negotiations.

This is not to say that the business owner will receive the asking price, only that the buyer has capacity to pay that price if they feel that the business is worth the price on the table.

Know the buyer

The buyer will be trying to gauge the lowest possible price the business owner may consider accepting. This is why it is important for the business owner to price the business as close to the market price as possible. In this way the business owner can always let the buyer know that the business has been priced to the market and the buyer should take this into account in their analysis.

A business owner may be more willing to negotiate on price if the terms provide a quick transaction, which is not based on finance or preconditions. It is important for the owner to consider what they are willing to negotiate on and under what conditions.

An owner may wish to offer terms to pay off the business over time to maximize the total value they receive for the business (this is called vendor terms). All of these things should be thought about before negotiations start to take place. The best possible outcome can occur for both the buyer and the seller. This negotiation is attempting to find a win-win situation between both parties.

The Owner Should Never Disclose That They Can Not Negotiate or it is Difficult to Negotiate.

As soon as the buyer knows what the owner can’t negotiate on, they may test the owners resolve to see if it is certain. This may even make the buyer firm their position of not negotiating. If the owner is firm in not negotiating, why should the buyer continue any negotiations?

Do Not Disclose Time Pressures

The moment the seller lets the buyer know they are under pressure to make a decision, the seller will become firmer in negotiations. Buyers generally have more liberty (in time), for negotiations then sellers and they will use that to their advantage (if the seller discloses that information). It is best for the seller to put in expectations for deadlines (soft timelines) without letting the buyer know if there are any pressures related to time.

Never Disclose Poor Outcomes from Previous Buyers.

The owner should not disclose poor outcomes from previous negotiations. This tells the buyer that buyers are a rare commodity and that the owner will likely negotiate further than expected. The owners’ ability to negotiate form this point is damaged.

Negotiate With a Purpose and Outcome in Mind

Amateur sellers will always allow for small concessions and escalate to larger ones. This always makes the buyer feel that there is more to negotiate on. The more concessions the owner allows the more the buyer will feel that they can negotiate. This might go on for a long time. Even if an agreement is reached they will never feel that they received value from their negotiation and the owner will feel as though they gave away their business.

Professional negotiators reverse this process. They give their biggest concession first and let the buyer know how absolutely difficult it was to gain that concession. As negotiations continue, the concessions they allow for will get smaller and smaller or may just stop. They will always resist the buyer in negotiations and make it uncomfortable to ask for more. When the process is over the buyer feels they have received value for money and there was little left to negotiate on, and the owner feels they have achieved a good outcome.

Determine What is Negotiable

If the owner is clear in their own mind what is negotiable then they will have the power to lead negotiation down that track. There will be times when buyers demand more than the owner is willing to concede. The owner should have a list of trade offs this will prepare them with strategies in the negotiation process.

Buyers will not value that which they can get easily. In fact if the owner is too quick in the negotiation process this will generally lead to a poor outcome. Conversely if the owner drags out the process then the buyer is just as likely to lose interest.

If the buyer has to work for a price cut, giving up something in return, they will feel they have done their job well and additionally feel like a winner. When they know they are going to have to give something up to get a better deal they will tend to make less demands for lower pricing in future correspondence.

Professional Advice

Gone are the days when businesses are sold on limited information. Today, one of the biggest problems buyers and sellers have during the business sales process is overconfidence. The self-righteous belief that they are correct and that buyers and sellers will believe what they are told.

Now all stakeholders have become more sophisticated and will review all information, make market analysis and take professional advice.

It is important to find a professional adviser, who you can trust and whose approach matches your ambitions.

Challenges

One challenge when managing a business sale/purchase process is to know whose advice to take. There are a large number of advisers that deal with business transactions and unfortunately not all of them are professional and responsible with the advice they provide.

In addition, business sales are an area where everybody has an opinion. Trying to follow the suggestions of friends, family or colleagues can be a problem, (while they will have your best interests at heart) they are not professionals, and unfortunately can be drawn as easily into myths and fashions as anyone else.

Business advice is still under-regulated. There are no minimum standards of service, or agreed expectations for professional conduct, or even an agreed minimum standard of qualification for entry into the business sales sector.

Given these concerns, a business owner or buyer is best advised to seek an adviser they can trust, understand and works for a common objective.

Ideally advisors should have recognised qualifications, and work in independent institutions not tied to a particular provider.

The Process

1. When trying to find a business advisor, start with referrals from other professionals, such as personal lawyers or bankers. Referrals can also be received from other small business owners or trusted individuals.

2. Make a list of questions to ask before calling any advisors. These questions can include: What are your qualifications in your area of expertise? What are your fees? Do you have references? These are questions that can help qualify if a potential advisor is a good fit.

3. Once an advisor is found a consultation meeting should be arranged. These advisors will preferably be qualified, have fees that you can afford, and must be able to provide you with references. Make sure that both you and the potential advisor set aside plenty of time for an interview (1-2 hours).

4. During the consultation meeting with the advisor, ask: Are you capable of achieving a particular outcome? How does financial information and records get transferred (hard copy or electronically)? What software will I need? How will you help me? What other services can you provide? Why should I choose you as my business advisor?

5. There will be other questions and discussion that are specific. A written list of questions should be prepared to take to the meeting. At request, a good potential advisor will be able to send out some information before the meeting.

6. A decision should not be reached until all potential business advisors that meet your expectations are interviewed. Some advisors have better deals or have better networking connections than others.

7. Business advisors are important. They will have access to confidential information and will be a valuable resource for solving or avoiding business problems down the road. If after completing this process you still are interested in more than one potential advisor, request a second interview, and ask more in-depth questions.

Range of solutions

There are a wide variety of places to seek professional advice. You could start with your bank. Typically, advisers at banks operate in a highly regulated environment. They tend to be cautious in the advice they offer, given the importance of reputation in this sector.

However, banks cannot always offer the range of products and scope of services that other professionals can. The advantage that other professionals have is that they are not tied to a specific set of products, so they can easily match your needs to a range of solutions.

Below is a list of potential advisors and services commonly offered by professionals that can help sell or purchase a business.

Business accountant provides tax planning, financial advice, and business consultation. They can scrutinize the financial records of a business.

Bookkeeper is responsible for keeping records and documents of a business.

Solicitor is a legal professional that handles all legal documentation involved in buying or selling a business. They will tell a buyer or seller their legal obligations and rights under a sale agreement.

Business broker is a professional or firm that acts as an intermediary between sellers and buyers of businesses and their intermediaries. They can act for either the buyer or the seller. They understand the requirements of all professionals involved and will help broker a deal. Many business brokers offer additional services in relation to finding a business, marketing, negotiations, valuations, appraisals and writing information briefs.

Valuer is a person qualified (by a reason of education, qualification and experience) to provide a professional and unbiased opinion of value using established valuation methodology.

Financial advisor (including banks) is a professional or firm who renders investment advice and financial planning services to individuals and businesses. Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset allocation. Financial advisers use stocks, bonds, mutual funds, options, futures, notes and insurance products to meet the needs of their clients.