When Should I Send my Financials to a Buyer of my Business?

by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

I am selling my business, and a potential buyer requested a copy of my financial statements before meeting me. Is it customary to send them at this point?

It’s common to send a potential buyer financial information about the company before a meeting takes place with the seller, provided there’s a signed non-disclosure agreement in place.

If confidentiality is still a concern, however, there are some steps that you, as the seller, can take to help prevent highly sensitive information from getting into the wrong hands (i.e., a competitor) at the wrong time (i.e., early in the process, before you’re satisfied that they are serious buyers).

Say hello to the concept of “phased release.”

With a phased release, information is given to the potential buyer in stages. As the buyer demonstrates to you his continued interest in your company, you will release to him more data, with the most sensitive information reserved for later in the process.

A phased release does not guarantee that information won’t get leaked, of course, but it offers a level of protection from the tire kickers.

The following article contains more information about sending your financials to potential buyers, including details on the phased release.

Send Adjusted Financials Before Meeting

Most M&A intermediaries and business brokers send a set of normalized or adjusted financial statements to buyers before meeting them, providing the potential buyer with an idea of the current financial results of the company. Nearly all business brokers and M&A intermediaries require a non-disclosure agreement before releasing the financials.

Use a Phased Release of Information

But if you are concerned about confidentiality, the best option is to use a phased release of information. Information is released at different stages of the sales process, with more sensitive information being released later in the process. Information can be provided in summary form early on, and more detailed information can be released at later stages in the transaction.

For example, if a buyer has inquired about your business for sale, then 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 SDE/EBITDA for several years. More detailed information could be released later in the process, such as when you physically meet with the buyer.

Screen Buyers in Phases

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 all at once early in the process. The solution is to use a phased process, both in screening the buyer and in releasing information to the buyer.

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

We feel that a mutual exchange of information is more than reasonable. Any buyer who refuses to release information to the seller regarding their qualifications signals that they are either not serious or unqualified.

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. Most buyers prefer to receive at least three years of P&L statements. A list of your monthly revenue for the previous three years is also helpful to assist them in identifying any seasonal or cyclical trends in your business.

We send the buyer normalized financial statements, including a common size analysis and information on percentage changes from year to year. We send these financials to a buyer in a spreadsheet format, which allows the buyer to perform their own analysis, make notes, and perform projections.

How to Screen Companies

When screening companies, you can ask for financial statements, references, a buyer profile, a disclosure statement, and a list of past transactions. You can also independently research the key people you are dealing with on the internet, Googling their name, email address, or phone number, or locating their social media profiles. You can also obtain someone’s IP address from the metadata in emails and documents, which can supplement your search. We frequently identify suspect individuals that initially contact us and arouse our suspicions after searching their background.

Managing Due Diligence

Sensitive information can be held in a centralized room or office at your home or business. This would allow 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 in 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.

Conclusion

In summary, a phased release of information is best, especially if you have any looming concerns in regards to confidentiality. The safest route for any business owner to take before providing sensitive 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. Ensuring 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.