Question: I am in the process of selling my business and a potential buyer recently requested a copy of my financial statements before meeting me. Is it customary to send them at this point or should I wait?

Answer: It will depend on a few key factors in regards to confidentiality and the status of the potential buyer.

Most M&A intermediaries and business brokers send a set of normalized or adjusted financial statements to buyers before meeting them, giving the potential buyer a good idea of the current financial stability of the company. They almost always require a non-disclosure agreement before releasing the financials; however, they rarely do little to ensure confidentiality beyond this. In all honesty, the non-disclosure agreement often protects the interest of the broker more so than that of the seller. Brokers often require an NDA to prove that they were the one that generated the buyer, which protects their commission.

Due to the fact that most businesses for sale on the market are for sale by business brokers, this has set a common precedent for most buyers. Because brokers readily send out financials so early in the process, this sets a fairly common expectation with buyers that they will receive financial statements anytime they ask for them. Most buyers expect to receive a full set of financial statements after initially inquiring about the business for sale.

While it is common for brokers to send out financial statements to buyers so early in the process, this may not be the best course for you if you are at all concerned with confidentiality. If the sale of your business is confidential, then you have several options.

The best option for an owner concerned about confidentiality is to use a phased release of information. Information is released in phases throughout this process with more sensitive information being release later in the process. Information can be provided in summary form early in the process. For example, if a buyer has inquired about your business for sale, then it may make sense to email the buyer a short summary on your business which also contains a snapshot of your financial statements. This snapshot could contain only the gross sales, gross profit and adjusted net for several years. More detailed information could be released later in the process, such as when you physically meet with the buyer. Requiring buyers to jump through a number of hoops allows you to screen or vet them in phases. Most buyers understandably get frustrated or offended if you attempt to pre-screen them too thoroughly early in the process. Your best bet is a phased process, both for screening the buyer and for releasing information to the buyer.

The best option for an owner concerned about confidentiality is to use a phased release of information.

This phased release of information should be mutual, and discussed with the potential buyer before assuming this route to be your best option. As you release more information to a buyer, you should also be performing due diligence on them. If a buyer asks you for financial statements, then ask them for bank statements and a copy of their credit report, for example. If a buyer asks for a copy of your lease and other information, then ask the buyer for their personal financial statement and a buyer’s disclosure statement. If the buyer asks you for bank statements and tax returns, then ask them for references and a background check. And so on. Your business is something you have worked very hard to grow and maintain, and its imperative to make sure that you are working with a serious buyer rather than someone who wants to grab up your ideas, and see what has worked for you.

This phased release of information should be mutual, and discussed with the potential buyer before assuming this route to be your best option. 

When we sell a business, we prepare a complete summary on the business in written form. The summary contains a buyer package, which includes a personal financial statement, buyer profile and disclosure statement. This package is given to buyers anytime they request additional information beyond what is in the business summary. We feel that a mutual exchange of information is more than reasonable and any buyer that refuses to do this signals to us that they are not a serious buyer or that they are perhaps unqualified as a buyer.

If the sale of your business is not highly confidential and you feel that releasing your financial statements early in the process would not equate to releasing sensitive information, then feel free to send a set of your adjusted financials to the buyer. However, please know the risks involved before sending out such private information.

Since the creation of the internet, it has become a very easy process for buyers to look for businesses for sale. It takes less than a couple minutes to go online, search a few businesses for sale, and then send an email asking for more information. Doing so does not make you a qualified buyer, in fact with the internet and the ease of the search, it often creates a breeding ground for scam artists and scrappers. Unfortunately, most brokers respond to these emails by sending out complete information on the business without further vetting the buyer. We believe it is both sensible and reasonable to further screen these buyers before releasing any sensitive information to them.

Since the creation of the internet, it has become a very easy process for buyers to look for businesses for sale.

What financial information should I send to the buyer? Always send normalized or adjusted financial statements. Never send your raw financial statements unless your financials do not require any adjustments and you are not concerned about confidentiality. Most buyers prefer at least three years of profit & loss statements. A list of your monthly revenue for the previous 5+ years is also helpful as it assists in identifying any seasonal or cyclical trends in your business.

In the initial phases, we recommend sending a simple P&L (not “Detailed”, if you are using QuickBooks). In other words, your P&L should fit on 1-2 pages maximum, basically the simpler the better. Include an adjusted balance sheet, if it is relevant to your business.

We normalized financial statements in Microsoft Excel, including a common size analysis and information on percentage changes from year to year. We send the financials to a buyer in Microsoft Excel format which allows the buyer to perform their own analysis, make notes, and perform projections. Some brokers believe in sending a PDF or a locked file in Excel but that simply does not allow for ease on the buyer part to make their own projections and analysis without having to reformat or create a new spreadsheet on their own.

What are some options for screening the buyer? Ask the buyer for a personal financial statement, buyer profile, signed disclosure statement, copy of bank statements showing the down payment, and credit report. A credit report is only relevant if the buyer is asking you to carry a note. We also recommend requiring a background check if you are financing a portion of the deal. If you have suspicions regarding the buyer, contacting a local private investigator to investigate the buyer can give you piece of mind and also assist in knowing what direction, in regards to confidentiality, you should go.

When screening companies you can ask for; financial statements, references, buyer profile, disclosure statement, and a list of past transactions. You can also independently research the key people you are dealing with little to no effort on the internet. A few public venues to research potential buyers are as follows; social media profiles, googling their name, email address, or phone number. You can also obtain someone’s IP address from the metadata in emails and documents, which can greatly supplement your search. We frequently identify suspect individuals that initially contact us and arouse our suspicions using these routes.

What information should I release to a buyer before they make an offer? There are two main phases in a deal. One – before an offer is made and accepted. Two – after an offer is made (Due diligence). Due Diligence is strictly confirmatory in nature. Information provided before an offer is made and accepted should assist the buyer in evaluating your business. It should not be used to confirm your representations. Buyers must accept the fact that they must take what you provide them before an offer is accepted at face value. Once they make an offer and you accept it, then due diligence can begin allowing them confirm your representations by reviewing the more detailed information.

Due Diligence is strictly confirmatory in nature​.

Sensitive information can be held in a centralized room or office at your home or business allowing you to give the buyer access to this room without making copies or sending sensitive information over the internet. Alternatively, you can create an online data room within the cloud as well. If you are comfortable with the buyer and confident with the transaction you can, at that point, provide the buyer with hard copies of all information.

The following information is typically released to a buyer before an offer is made and accepted:

  • Balance Sheet
  • Breakdown of  sales by customer type (not customer name)
  • Breakdown of sales by product or service type
  • Equipment list
  • List of key competitors
  • Marketing material
  • Profit & Loss Statements
  • Schedule of owners and capitalization
  • Seller’s Disclosure Statements
  • Short description of Real Estate owned
  • Summary Description of Environmental Liabilities
  • Summary information regarding intellectual property
  • Summary information regarding pending litigation (if any)
  • Summary list of inventory
  • Summary of key lease terms
  • Summary of staff and key employees (not names)

The following information is typically released to a buyer after an offer is made and accepted:

  • Accounts Receivable Aging Schedule
  • Annual Personal Property Tax Certificate
  • Bank statements
  • Copies of Existing Loan or Financing Agreements
  • Copies of key contracts
  • Customer list (names are sometimes provided after closing)
  • Detailed inventory list
  • Employment, Agency and Independent Contractor Agreements
  • Equipment leases
  • Federal Income Tax Returns
  • Financial Budgets and Projections
  • Full financial information with source data (ex: QuickBooks file)
  • Full QuickBooks File
  • Operations Manual
  • Premises lease
  • Supplier and Vendor list
  • Supplier/Vendor contracts

Summary: In summary, a phased release of information is best especially if you have any looming concern in regards to confidentiality. The safest route for any business owner to take before providing all business information is to ensure you are working with a qualified buyer, who is not only serious about the purchase but is financially able to complete it. Also, making sure that a confidentiality agreement is signed before any sensitive material is released can also safeguard you and your company against any unauthorized use of business information or intellectual rights to your business as a whole.