Welcome to the first of a series of Ongoing Conversations with Jacob Orosz, president of Morgan & Westfield, a nationwide leader in business sales and appraisals. Today, host Jeff Allen talks to Jacob Orosz, President of Morgan and Westfield, all about offering memorandums – what they are, what they do and why you should use one when selling a business. If you think that selling a business is in your near future, then this podcast should not be missed.

  • The goal of the offering memorandum is to get to the next step which is typically face-to-face meeting or a conference call.
Jacob Orosz
Business Sales, Business Appraisals,...

Key Takeaways To Remember

  • This document is so critical in the process of selling the company that you really should commit a lot of resources to preparing this document.
  • If you don't have an offering memorandum, you're going to be engaged in dozens and dozens of conversations with perspective buyers and they're all going to ask the same hundred questions over and over and over again.
  • By sending a teaser profile they're not exposing the identity of the company. They're helping to maintain confidentiality in the process.
  • The document is going to vary based on the industry that the business is in.

Jeff: Welcome to the first of the series of Ongoing Conversations with Jacob Orosz, president of Morgan & Westfield, a nationwide leader in business sales and appraisals. Jacob, today what we want to talk about is offering memorandums. And we're going to talk a little bit about these over a series of programs but let's start by talking a little bit about the form and function of offering memorandums. We'll start with a very, very simple question --- what is an offering memorandum?

Jacob: That's a good question to start with. An offering memorandum is basically like a business plan. It's a document that is prepared by typically M & A intermediaries to represent the sale of a company. It's typically emailed to a prospective buyer of a company and typically, in a form of a PDF document usually twenty, thirty, forty pages and like I said, it's very similar to a business plan.

An offering memorandum is basically like a business plan.

Jeff: Are there any other terms for “offering memorandum”? Maybe some terms that we might be more familiar with or that we've heard out possibly even on the street?

Jacob: A ton of terms, there really is no standard. They're always developing new terms. In the venture capital world, it's usually called a deck or a pitch book. Investment bankers typically call it a selling memorandum or confidential information memorandum which is sometimes abbreviated CIM. In main street or for the sale of smaller companies, it's sometimes called a business summary or confidential business review, CBR. Sometimes it's called “the book” for short, and if I had to choose one standard, it probably would be “offering memorandum” and that's used by M & A intermediaries and again, for venture capitalists, probably, I think they call it a pitch deck and for investment bankers, they do have a standard as well, they probably call it a CIM.

 

Jeff: Very, very good. Now deck I have heard associated with Powerpoint presentations. So, can this be a Powerpoint presentation?

Jacob: You know, it could if you want to but it usually isn't. The reason they use Powerpoints when presenting to a venture capitalist is because it's, you'll say, presented in person. So, you're there presenting with the Powerpoint, walking the VC through the deck. Whereas, when you're selling the company, typically you're not present. You email it to them and they look through it as a document, so, it just doesn't make sense to prepare that as a Powerpoint. That's kind of weird reading through a Powerpoint without having somebody present it to you.

 

Jeff: That's a good point. You know, all businesses, Jacob, we know, are different. But I would imagine that all businesses with an offering memorandum do have to include certain items that are the same or that are common among all of them. Can you give us kind of an idea of what might be included in a typical offering memorandum?

Jacob: There is a fairly lengthy table of contents. It's pretty similar to a business plan. You really need to understand the business, the operations, the industry's financial information and so forth. Very, very similar to a business plan with the exception that, sometimes, there's deal-related stuff in the document and for larger deals, there might be a summary of the auction process and some other information regarding submitting a bid and so forth. But, for the most part again, very, very similar to a business plan with some minor exceptions.

 

Jeff: Let's talk again about how long it is. I think I heard you say about...did you say about forty pages, typically?

Jacob: I would say somewhere between twenty and forty at the lower end of the market from main street deals like restaurants and gas stations and so forth. There's just a huge, really wide, variation for the length of the documents. It can be from a page to fifty pages. In the middle market, which is deals, grossing, say five to a hundred million, I think most of those documents are twenty to forty pages long and those documents tend to be much better prepared than in the main street for the smaller deals.

There's just a huge, really wide, variation for the length of the documents. It can be from a page to fifty pages.

Jeff: The offering memorandum includes something that is called a teaser profile. Let's talk a little bit about that and what that is. 

Jacob: A teaser profile is just that, it's meant to tease the interest of a prospective buyer. That's typically a blind profile, meaning, it doesn't disclose the identity of the business. It's actually a separate document from the offering memorandum. It contains some of the similar contents as the offering memorandum but again, it's a blind profile. So, if you read that teaser profile, you're not going to know what business it is for. And the purpose of a teaser profile is when M & A intermediaries are going to sell the company. They're typically sending that out to prospective buyers. By sending a teaser profile they're not…not exposing the identity of the company. They're helping to maintain confidentiality in the process. Typically, at the end of the teaser profile, there's an NDA for the buyer to sign and if the buyer wants more information, they sign the NDA and then, the professional sends over the full offering memorandum at that point.

 

Jeff: Well now, Jacob, what I would like to do is...let's talk a little bit about why the offering memo is important?

Jacob: Very good question again. Two reasons: number one, it is the very first document in the process that the buyer sees and perception is absolutely critical. If you send a poorly prepared document to the buyer, that's really all they have to see on the company. And if it doesn't generate their interest, they're going to move on. So, looking at the processes as a sales funnel, this is the first step in the funnel or the process of buying or selling a company and it's a critical component in the process.

Secondly, from an efficiency standpoint, you cannot efficiently sell your company without preparing this document. If you don't have an offering memorandum, you're going to be engaged in dozens and dozens of conversations with perspective buyers and they're all going to ask the same hundred questions over and over and over again. With an offering memorandum prepared, you just email it to the buyer and boom! They have all the information. So, it makes for a much more efficient process.

If you send a poorly prepared document to the buyer, that's really all they have to see on the company.

Jeff: Jacob, now let's talk about the purpose of the offering memo.

Jacob: The purpose is twofold. Number one, it is to persuade the buyer to take the next step. I like to view the process as a sales funnel. It's really a series of steps that you need to go through to sell your company. And I like to look at this as discreet, concrete steps. The first step is the buyer reviewing the offering memorandum. The second step is typically a meeting or a conference call. So, the goal, the primary goal and a lot of clients get this wrong - they think the goal is to get an offer - it's not. The goal of the offering memorandum is to get to the next step which is typically a face-to-face meeting or a conference call.

The second purpose of the offering memorandum is to help the client - the owner of the business, the seller of the business - understand the real value of their company. It's to help them get a perspective on the company that they probably never had before. By reading that document, this twenty, thirty, forty-page document, their company...it provides them a perspective they've never, ever seen before in their company by being able to look at their company as an outsider. This helps clarify the real value of their company which can really help them in terms of negotiations.

 

Jeff: Let's say for just a minute, we'll just kind of hypothetically, I'm the owner of maybe a chain of car-washes and let's say these are car spas so they provide detailing and all of that and I am interested in pursuing the sale of my business. How does the process work with regard to what we talked about, the memo and everything?

Jacob: The process for a small market company is slightly different than for a middle market company and again, small market or main street is defined as companies with less than five million in revenue. There really isn't a clear line but it's a general rule of thumb that they would be companies with less than five million in revenue. But for a company of that size, once the document is prepared and once we've identified the buyer and once they've signed a non-disclosure agreement, we would provide them the offering memorandum. They would, then, read through that and simply let us know if they're interested or not. It really is that simple. They read through the document and will call or email us and say "We're interested. We've got five questions or fifteen questions" or "Can we set up a conference call with the seller" or "Can we set up a face-to-face meeting with the seller"? This really ties back into the purpose of the document which is to take the deal to the next concrete, discreet step in the process and the next step in the process, the next goal, is to get to that face-to-face meeting or that conference call.

In the mid-market deal, it's the same step from reading the document to scheduling a conference call or to scheduling a face-to-face meeting. The only difference is on the front-end with the teaser profile. Teaser profiles are typically given to the buyers in the middle market deals. But again, it's a discreet, concrete step from reviewing the document to setting up a call or a meeting. Very simple process.

 

Jeff: So, what does an owner do if they're concerned about confidentiality and then, we already talked about the NDA and then signing that. We already talked about, too, about that brief...the teaser profile. Nevertheless, you get down to the end of the day, confidentiality does become a concern for some people. So, what is an owner to do about that?

Jacob: It's really, really simple. Just...it should be a phased release of any confidential information. You don't want to put that stuff in the offering memorandum. If you have any sensitive information, you need to withhold that until negotiations are more advanced in the process. And a business owner really needs to get the advice of a professional on this…..customer list and things like that. Trade secrets...those should really be released in a more advanced stage in the deal.

If you have any sensitive information, you need to withhold that until negotiations are more advanced in the process.

Jeff: Let's talk now about who should prepare the document for you, Jacob.

Jacob: Another professional should do that. Business owners are experts in what they do but, you know, there's just a blind spot. They don't have the perspective to be able to identify the value that's in their company. So, ideally, somebody experienced in M & A should prepare the document.

 

Jeff: Are there any other benefits with regard to the offering memorandum that maybe we haven't already covered and discussed?

Jacob: Yes. Preparing the document is somewhat of a form of pre-sale due diligence, so to speak. It helps identify problems that should be corrected before going to market. That's one of the primary benefits. And also, secondly, we've covered this but...now, buyers have choices. They can’t afford to conduct an in-depth analysis of every business they look at. And this document is so critical in the process of selling the company that you really should commit a lot of resources to preparing this document. You just don't have a second chance. If they look at this and they're not interested, they're not going to take the second step, the next step, and you're not going to sell your company to the buyer.

You just don't have a second chance.

Jeff: Now, just for clarification purposes and I think we probably touched on this just a little bit early in the going here on this discussion. Do these documents tend to differ based on the size of the business or the industry?

Jacob: In the middle market, depending on the size of the company, size in terms of revenue or asking price, some of these do not include an asking price. And just for clarification for everybody that's listening to this, if you have a restaurant, you have to include an asking price in the document. But for companies grossing an excess of somewhere between ten to fifty million dollars or more, they may not include an asking price and some businesses are sold through an auction process and in addition to that, obviously, the document is going to vary based on the industry that the business is in. And other than just differences that you would expect in the document, most are pretty standardized. Then, buyers like to see these documents in a standardized form.

 

Jeff: There, I know, are a number of people that are probably listening right now to this program and they're ready to take the next step. While at least they're considering it, do you have any tips for preparing an offering memorandum when selling your business? Any tips at all that you can pass along?

Jacob: I would say the number one weakness that we see in those documents is that they're not readable. Buyers, especially sophisticated buyers, are extremely busy. They don't have time to read long blocks of prose and confusing jargon. They should be succinct. They should be short. They should be concise, interesting, readable. They should be formatted so they're, you know, easy and quick to go through. And, again, it's such a critical step in the process. And at this point the buyers are not committed. They're just taking a casual look at the business. So, it really needs to come out and hook them. If it's an obfuscated, messy document, it's going to go to the bottom of their email pile or the bottom of their to-do list and chances are, you're probably going to lose out on going to the next step with that buyer.

 I would say the number one weakness that we see in those documents is that they're not readable.

Jeff: Well, Jacob, we've ran out of time. This segment we've been talking is about the form and function of an offering memorandum. I hope that you've got a lot out of it today and Jacob, once again, thanks so much.

Jacob: Thank you, Jeff, and I look forward to the next segment.

 

Jeff: You've been listening to Conversations with Jacob Orosz, president of Morgan & Westfield.  If you'd like more information about selling or buying a business, call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. I'm Jeff Allen.