If it’s not in writing, it doesn’t exist.
These words stand true in most aspects of life in the eyes of Dr. John Binkley. When you fail to note your ideas, beliefs, processes and more on paper, they are lost to the world in your absence.
Indeed, Dr. Binkley’s commitment to this saying was a driving factor behind writing his book, Character is King. He urges everyone reading this to write their own book or keep a journal, so your unique experiences and thoughts are kept alive, whether they are left just for your loved ones or preserved for the world to discover.
However, the importance of documentation increases exponentially for business owners, particularly when you are preparing to exit. If you want to achieve the optimal value for your company, keeping up-to-date documentation of its most important aspects will present an accurate reflection of your company’s worth, highlight instances where its value can be enhanced, and ensure your business is “buyer ready.”
In this blog post, Dr. Binkley expands on how documentation plays a fundamental role in your business sale, provides three key examples of M&A documentation, and the explains the significance of other documents that outline your business processes.
Documentation that makes your business “buyer ready”
It is important to establish immediately what documentation is essential to becoming “buyer ready.” No matter what, it is critical that you start documenting this data as early as possible, so you are in a position to exit your company when the timing is right, and not due to circumstances beyond your control.
Before you even present any information to a prospective buyer, this documentation plays a key role in an M&A advisor determining the true value of your business. Unless you have a background in finances, it is unlikely your immediate assessment of your company’s worth will reflect its true value. For Dr. John Binkley and the team at Generational Equity, this is the first step towards an optimal exit strategy.
Without a comprehensive collection of your finances, equipment, facilities, and other valuable data, it is impossible to provide an accurate reflection of your company’s value. This means you could risk leaving money on the table at exit, or you could have unrealistic value expectations and expect a higher value than the market will bear.
So, by starting to document this information early, long before you are ready to exit, it will speed up the process for an M&A advisor to determine your magic number, allowing you to enter the market as soon as possible and take advantage of favorable market conditions.
It sounds like a no-brainer, but you would be surprised at how many business owners are lacking the necessary information when they decide to exit, wasting valuable time to accrue this before it can be presented to professional buyers. Findings published in 2016 by the Association for Information and Image Management (AIIM) discovered that less than 25 percent of organizations capture data from paper directly into their business processes.
Professional buyers are going to want to see your financials, both historical and projections for the future, information about your customer and supplier base, current operations, staff details, a history of your company, etc. These will be required as standard and are essential to securing any realistic transaction with a buyer.
But, there is documentation that could prove extremely valuable in helping your business stand out against competitors. Remember – professional buyers examine hundreds upon thousands of prospective targets every year. In order to motivate them to pursue your business in a crowded field, it is highly encouraged you go beyond the minimum expectations when compiling your business documentation.
What’s an example of valuable documents that are often missed? One that springs to mind immediately is your off-balance sheet assets, also known as intangible assets. These will not be featured in your earnings and other financial records, but they have a significant bearing on your value in the eyes of certain buyers.
Ask yourself – do you have written records, statistics or proof of your company’s:
- Patents, Trademarks and Copyrights;
- Brand Value and Reputation;
- Subscriptions and Service Contracts;
- Video and Audiovisual Material;
- Internet Presence?
Keeping a comprehensive catalog of your intangible assets can pay dividends when selling your business. Just because their value can’t be quantified in the same way as your earnings or equipment, you should not neglect them. Your ideal buyer will likely recognize more value in these intangible assets than others, enhancing your return on investment.
3 Essential M&A Documents
Dr. John Binkley’s experience with Generational Equity has familiarized him with the vast number of documents that are required to complete a transaction, especially when you want to ensure you are exiting for the optimal value. Here are three of the critical documents that you will certainly encounter when you engage in M&A activity.
First and foremost, before transferring any key documentation to a prospective buyer, it is critical to have a Confidentiality Agreement drafted, preferably by an attorney who is familiar with the M&A process. If you reveal this information to a buyer without this being signed, you open your business up to a world of risks that can easily be prevented. This is a necessary expense to protecting your business during this process.
Your Offering Memorandum is the comprehensive package that displays to buyers the factors that make your company a viable acquisition target. Usually ranging between 40 and 60 pages, depending on the unique conditions of your business, this will play a key role in convincing buyers to proceed with negotiations and pursue the most beneficial offer. Elements that will feature in your Offering Memorandum will likely include:
- Three years of historical financials
- Five years of projected financials
- A full description of the company, including a complete history, its current operations, and future growth opportunities
- A SWOT analysis on the business (strength, weakness, opportunities and threats)
- Analysis of the projected growth of your industry
- An examination of key clients and suppliers
- Full disclosure of significant contractual relationships with suppliers/customers
- An organizational chart with a focus on critical employees and their relationship with the company
- A full list of off-balance sheet assets that make the company unique and successful
With this quantity of data, you can see why it pays dividends to start the documentation as early as possible. Furthermore, it is crucial that all information contained within your Offering Memorandum is accurate and truthful. The temptation to inflate numbers to entice a better offer might feel worthwhile in the short-term, but the due diligence performed by professional buyers will discover any discrepancies, which could significantly damage the trust between both parties.
Letter of Intent
Last, but undoubtedly not least, is the Letter of Intent (LOI). You may be unaware of this unless you have experienced an M&A transaction – it is essentially a neutral document that is designed to protect both parties during the deal, and ensures any breaks in this can be settled without one side being unfairly disadvantaged.
For instance, as the business owner, you will want to ensure time isn’t wasted compiling documents or negotiating with a buyer that isn’t committed to seeing the deal through, or is keeping an eye on other opportunities. In the same vein, a buyer may want exclusivity in negotiations and not have to enter a bidding war with another acquirer at the 11th hour.
Through Letters of Intent, the interests of all parties are protected throughout the M&A process. The support of an experienced dealmaker in agreeing to the terms of an LOI can be invaluable in keeping deal negotiations flowing and ensure that your side of the equation is completely fair.
Diligent Business Documentation
In conclusion, Dr. Binkley hopes this article gives you an insight into how important writing and frequently updating your important business documentation can be to exiting for the optimal value. By tracking your key financial details, as well as often-missed intangible assets, you take massive strides in building a “buyer ready” company – one that is primed to enter the market when time is of the essence, rather than hurriedly preparing due to unforeseen circumstances.
Of course, the documentation mentioned above is just a taste of the documentation you should be keeping to ensure the effective operation of your business. Examples like business continuity plans and company hierarchies not only reduce the responsibility of running the business on your shoulders, as others can quickly be made aware of the required processes, but also demonstrate to buyers that your company is effectively prepared for all eventualities. This could be a valuable advantage in the pursuit of the right deal.
For more information on the kind of business documentation you should establish in your company, Generational Equity’s regularly updated insights include several articles dedicated to prominent M&A documentation and how they impact your sales value.
Alternatively, you can download their whitepaper entitled “Make Your Company Buyer Ready” to discover what documentation, among other things, helps to build your business with your preferred buyer in mind.
If you’d like to learn more about Dr. John Binkley, you can read more about his life and experience on his website.