Handling Additional Information Requests

Managing highly sensitive details about your company is paramount. You want to keep control of your information to prevent it from getting into the wrong hands, such as a competitor, or being released at the wrong time, such as early in the process before you’re satisfied you have a serious buyer.

The following section contains recommendations about when and how to send sensitive information to potential buyers. 

Use a Phased Release of Information

If you’re concerned about confidentiality, the best option is to implement a phased release of information. In a phased release, facts and figures are given to the buyer at different stages, with more sensitive information released in later stages in the process. Information can be provided in summary form early on and then in greater detail later in the negotiations. For example, it may make sense to email the buyer a snapshot of your financial statements before emailing them a profit and loss (P&L) statement. This summary could contain only the gross sales, gross profit, and EBITDA for several years. More detailed information can be released later in the process after they have expressed explicit interest.

Any buyer who refuses to release information to you regarding their qualifications signals that they are either not serious or unqualified.

What Financial Information To Send the Buyer 

Most M&A intermediaries send a set of normalized or adjusted financial statements to buyers after the buyer reviews the CIM and expresses interest, providing the potential buyer with an idea of the current state of the company. Always send normalized or adjusted financial statements. Never send your raw financial data unless your financials don’t require any adjustments. Most buyers prefer to request three years of P&L statements. A list of your monthly revenue for the previous three to five years is also helpful in identifying any seasonal or cyclical trends in your business.

When dealing with buyers, I always send normalized financial statements, including a common size analysis, and information on percentage changes from year to year. I send these financials to a buyer in a spreadsheet format, which allows the buyer to readily perform their own analysis, make notes, and prepare pro forma profit and loss statements based on any synergies or changes they anticipate making to the business. 

When To Give Year-to-Date Financials to the Buyer

At some point in the sales process, a prospective buyer is likely to request interim financial statements for your business before they submit an offer. You should be in a position to provide this information, but here are a few important points to keep in mind:

  • Send Normalized Financials: Don’t send your raw or unadjusted financials to the buyer. Be sure you send adjusted or normalized financials. Buyers won’t be able to calculate EBITDA unless you provide them with the necessary adjustments to your financial statements.
  • Compare Year-to-Date With the Previous Year: Send the buyer a comparison of this year’s and last year’s numbers. If it’s October and the buyer is requesting to see the January-to-September P&L statement, send them January to September for the current year and January to September for the previous year. This allows the buyer to account for seasonality in your business and see how your business is performing relative to the same period last year. Alternatively, you can send a trailing twelve months (TTM) or last twelve months (LTM) profit and loss statement, along with the year-earlier comparison.
  • Explain Timing in Relation to Revenue Recognition: Beware of timing differences in recognizing revenue and expenses. You may have just landed a seven-figure contract, which may skew the results significantly. Alternatively, you may have just booked a large expense that could inflate your expenses for the interim period. Some businesses don’t perform proper accrual accounting and use a hybrid system that consists of both cash and accrual accounting. Additionally, since you’re working off interim financial statements, your accountant will not have made the final entries into your system for items such as depreciation. For these reasons, it’s important to tell the buyer the story behind the numbers.
  • Show Your Monthly Revenue Chart: I also recommend showing the buyer a chart of the monthly revenue for your business. Focusing on short-term trends can skew a buyer’s perspective. Show the buyer a chart of your business’s monthly revenue to prevent a myopic perspective on short-term results.

You can also use your YTD financials as a tool to gauge interest and further qualify a buyer. I recommend intentionally withholding your interim financial statements from your CIM. Doing so forces the buyer to request them directly. If the buyer goes out of their way to ask you for updated financial statements, you can reasonably assume that such a request is a good sign.

Warning: If the buyer sends you a detailed request for additional documents, such as tax returns, before they submit a letter of intent, they’re likely attempting to shop your business for financing. This is a warning sign and common among less experienced corporate buyers – the buyer should request your permission to share your confidential information with third parties before doing so. Stop the process immediately and talk with the buyer. You don’t want them shopping your business without your knowledge or consent.