Mergers & Acquisitions – They say selling a business is an art – we’ve turned it into a science

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Home Buyers Buyer’s Guide 3: Review Information
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3: Review Information

Summary of the Process

A) Review the CIM and financials

    Introduction

    Once your non-disclosure agreement is approved by Morgan & Westfield, you’ll receive preliminary information about the business, including a confidential information memorandum (CIM) and financial statements. Please note that any information beyond the CIM and financial statements is only released after an IOI has been submitted and approved.

    Confidential Information Memorandum (CIM)

    Information in the CIM

    The CIM is a comprehensive document that describes all major aspects of the business. While it addresses the most common questions, the CIM doesn’t cover every question you may have about a particular business. 

    The Purpose of the CIM

    The purpose of the CIM is to help you decide whether to arrange a virtual or face-to-face meeting with the seller or submit an offer.

    Financial Statements

    You will receive the following financial statements after you sign the NDA:

    The following information is only released after an LOI is accepted:

    • Cash flow statements
    • Profit and loss statements older than three years
    • Balance Sheet older than three years
    • Inventory reports
    • Accounts receivable reports
    • Accounts payable reports
    • Tax returns

    Phased Release of Information

    There are three main phases in a transaction

    • Phase 1 – Pre-IOI: The period before an IOI is approved.
    • Phase 1 – Pre-LOI: The period before an LOI is accepted.
    • Phase 3 – Post-LOI (Due Diligence): The period after a LOI is accepted (i.e., due diligence).

    Phase 1 – Pre-IOI

    An IOI is a non-binding letter you send to a seller expressing your preliminary interest in purchasing their company. It usually outlines a potential price range and key deal terms to initiate further discussions. If your IOI is approved, we will move to the next steps of the process, which generally include arranging a meeting with the seller or sending you additional information on the business.

    Information released before an IOI has been approved is very limited.

    Phase 2 – Pre-LOI

    The information provided before an LOI is accepted allows you to evaluate the business initially. A thorough investigation of the business can be only conducted after an LOI is accepted, during the due diligence period.

    Confidentiality may be compromised if the seller releases documents to every buyer who requests them, and an informational leak may be difficult to locate and control. For this reason, sensitive information is released only after an LOI is accepted.

    At the beginning of the sales process, the seller makes claims that are only verified after a LOI is accepted and you officially begin due diligence. You’ll receive detailed information to verify the seller’s claims only after a LOI is accepted.

    Phase 3 – After the LOI is Accepted (aka Due Diligence)

    Representations the seller makes are only confirmed after an offer is accepted. Once the seller accepts your offer, due diligence begins, which allows you to confirm the seller’s representations by reviewing more detailed information, such as tax returns and bank statements.

    The following information is typically released to you after an LOI is accepted:

    Assets

    • Equipment inspection reports
    • Equipment leases
    • Equipment values
    • Detailed inventory and equipment lists

    Financial

    • Accounts receivable aging schedule
    • Accounts payable summary
    • Bank statements
    • Cash flow statements
    • Federal income tax returns
    • Financial budgets and projections
    • Complete financial information with source data
    • Invoices and receipts
    • Sales and use tax reports

    HR

    • Employment, agency, and independent contractor agreements
    • Staffing and payroll-related documents, including job descriptions and employment contracts

    Legal

    • Copies of existing loan or financing agreements
    • Copies of key contracts
    • Environmental documents and inspections
    • Licenses and permits
    • Third-party contracts, such as supplier or vendor contracts

    Operations

    • Operations manual
    • Supplier and vendor list

    Real Estate

    • Annual personal property tax certificate(s)
    • Premises lease

    Sales & Marketing

    • Marketing, advertising, and promotional documents

    Third-Party Documents

    • Franchise-related documents (e.g., franchise agreement, franchise disclosure document, etc.)
    • Insurance-related documents such as workers’ compensation, health, and liability insurance

    The Importance of Confidentiality

    Confidentiality is essential to the sale of a business. The sales process requires owners to reveal sensitive and personal information to numerous third parties. Maintaining the confidentiality of a proposed transaction is essential to avoiding disruptions in any business.

    Respect the Need for Confidentiality

    Respect the seller’s desire to keep the sale confidential and communicate the importance of confidentiality to all parties involved on your side, such as your investors, your spouse (if they may overhear conversations), or any partners you may have. Obtain written permission from the seller before disclosing any information regarding the business to any other parties and request that those parties also sign an NDA.

    The Implications of a Confidentiality Breach

    Maintaining confidentiality prevents customers, suppliers, and employees from worrying unnecessarily about the future of the business and seeking an alternative. If it becomes known that a company is for sale before it’s publicly announced, its reputation can be negatively affected, and revenue may decline as a result. Competitors may leverage the information to poach clients, customers may decide to do business elsewhere, and employees may experience uncertainty and make plans to leave the company.

    Limit Who You Contact

    Any interactions about the sale should be limited to the owners, Morgan & Westfield, and the seller’s professional advisors. Management or employees may not be aware of a proposed transaction, and inside knowledge of the sale could disrupt the business or interfere with the owner’s plans.

    Frequently Asked Questions

    Can you destroy my signed NDA if I am not interested in the CIM and financials anymore? No, we must retain a copy of your signed NDA in the event any provision in the non-disclosure agreement is violated.

    Can I receive copies of the seller’s tax returns if I submit an Indication of Interest? No, we only provide copies of the seller’s tax returns upon acceptance of the letter of intent, during the due diligence period.

    Can I receive a copy of the tax returns and bank statements before submitting an offer? Once an offer is made, you’ll have sufficient time to conduct due diligence and verify the accuracy of financial records and other information. Many buyers request to see tax returns and bank statements before making an offer, but releasing this information to every buyer who requests it would put the seller’s sensitive information in jeopardy because confidential information would be released to multiple parties. We therefore only release tax returns and bank statements after an offer has been accepted. Some buyers also request tax returns so they can obtain a pre-approval letter for financing. Comprehensively evaluating a business for financing can only be done during due diligence. We do not release tax returns for pre-approving a business for financing.

    2: Sign the NDA
    4: Submit an Indication of Interest