Once you've decided to sell, someone will need to describe your business to people who've never seen it. If you use a broker, they'll talk about preparing an information memorandum. If you're selling privately, a buyer will ask for "the pack". Either way, it's the first full picture of your business most buyers will see, and their first offer will be based on it.
It has two jobs that pull against each other. It has to make good buyers want to know more, and every fact in it has to stand up when they check, because they will. This guide covers where it fits and what goes in it, then how to keep it accurate.
Where it fits in a sale
Sales usually share information in stages, so that the most sensitive details only go to buyers who are serious and have signed up to keep them confidential. The usual order is this.
- The teaser. A short summary without your name, sometimes called a blind profile. It goes to a long list of possible buyers.
- A confidentiality agreement. Buyers who want more sign one before they see anything that identifies you.
- The information memorandum. The full description of the business, sent to a shortlist.
- Meetings and offers. Buyers visit and make indicative offers, and you agree heads of terms with one of them.
- Due diligence. The buyer sees the detail, such as contracts, customer names and staff records, usually through a secure online data room.
If you use an adviser, they'll usually check how serious each buyer is, and whether they could fund a purchase, before sending the information memorandum. Our guide to business brokers covers what they do.
Keep a list of who has received the memorandum and when, and of which version they had. Numbering each copy, or marking each with the buyer's name, makes people more careful with it. If a buyer drops out, the list tells you whose copies to ask for back under the confidentiality agreement.
The teaser
A teaser describes the business without naming it. It usually gives the sector, a broad location, the size of the business and its main strengths, and says what kind of deal you want. Its only job is to get the right buyers to ask for more.
In a small area, the details can give you away. A teaser for a nursery in Tonbridge with a stated number of places, or a firm of accountants in Sevenoaks with a stated fee income, may be recognisable to anyone local. Keep the location broad, such as the county, and round the figures. Describe the business by type rather than by its best known feature.
What goes in an information memorandum
There's no set format, but buyers expect to find the same things, and government business support guidance lists much the same contents. A typical memorandum covers these.
- A summary. What the business does, why you're selling and the kind of deal you'd like, such as selling all of it, part of it or in stages, and your role afterwards.
- History and ownership. How long you've been trading and how the company is owned.
- Customers and how you win them. Who buys from you and why, with the spread of customers shown without names, such as the share of sales from the largest.
- The team. The structure by role, how long people have been with you, and who runs things day to day without you.
- Premises. Whether you own or lease them, the main lease terms, and any licences the business needs to operate.
- The figures. Results for recent years and the current year so far, showing how profit, cash flow, assets and debts have changed. If you show an adjusted profit, list each adjustment and why it's there.
- Opportunities. Where the business could grow, with the reasons you haven't done it yet.
- The process. How to respond, who to contact and any deadline for offers.
Give a clear reason for selling, and make it the real one. Retirement, or wanting to step back after many years, is a reason any buyer understands. A vague answer makes buyers wonder what they haven't been told, and they'll keep asking.
Buyers read the figures first, and adjusted profit gets the most questions. Our guide to EBITDA explains how buyers look at it. Show how you got from the accounts to the figure you're quoting, so nobody has to guess.
What to hold back until later
An information memorandum goes to several buyers, and some of them may be competitors. The government's business support guidance says it shouldn't include confidential information such as customer names or your pricing structure. Hold back these, too.
- Customer names, contract terms and margins by customer.
- Supplier terms and anything that shows what you pay.
- Staff names and individual salaries.
- Know-how a competitor could copy, such as your methods or recipes.
Staff details are personal data, and data protection law expects you to share no more than is needed for the purpose. At this stage a buyer needs to understand the team, not identify its members, so describe people by role. In a small team, be careful that a job title on its own doesn't identify someone.
If one of the likely buyers is a competitor, think about whether it should see the full memorandum at this stage, or a version with less detail. Competition law also limits what competing businesses can share with each other, such as prices, customers, suppliers and the markets they plan to sell to, so take advice before going further with one.
Who writes it
If you use a broker or corporate finance adviser, writing the memorandum is usually part of their job, and they'll know how buyers read one. If you're selling privately, you'd normally write it yourself with your accountant, and it can be shorter.
Whoever writes it, the facts come from you and it goes out on your behalf. Read every page and check each figure against your accounts before it's sent. Keep a note of where each figure came from, because it will save time in due diligence, when the buyer's accountants ask the same questions.
Keeping it accurate
An information memorandum isn't a contract. But if a buyer signs the sale agreement after relying on a false statement of fact you made, and loses money as a result, they may be able to claim damages for misrepresentation. Under the Misrepresentation Act 1967, the seller is liable unless they can show they had reasonable grounds to believe the statement was true, and did believe it, up to the time the contract was made. In some cases the buyer may also be entitled to have the contract set aside, though a court can award damages instead.
Two practical points follow. Every statement of fact should have evidence behind it. And because the test runs up to the day the contract is signed, anything that changes before then, such as a large customer leaving, needs to be passed on to the buyer.
Forecasts and opinions need a sound basis too. Label forecasts as forecasts and say what they assume. Don't present a hope as a plan. Words like "guaranteed" or "always" invite questions you'd rather not answer.
Memoranda usually include a disclaimer saying the buyer must make its own enquiries. The share purchase agreement also tends to say the buyer hasn't relied on anything outside it. Both help. But the law only lets a contract term exclude liability for misrepresentation if it meets a test of reasonableness, and it's for whoever relies on the term to show that it does. A disclaimer is no substitute for getting the facts right.
If you're selling shares, check the financial promotion rules
The law restricts financial promotions, which include invitations or inducements made in the course of business to buy investments such as shares, unless an authorised firm makes or approves them. An information memorandum for a sale of shares can count as one, and breaking the restriction is a criminal offence. There's an exemption for selling a company. It covers the sale of half or more of a company's voting shares where each side is a company, a partnership, an individual or a group of connected people, such as the directors and their close relatives. It also covers some other sales where the buyer is taking day to day control.
If you're selling less than half your shares, or to a wider group of investors, the exemption may not fit. Ask your solicitor how the rules apply before the memorandum goes out.