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

I’m currently in the process of selling my business, and a potential buyer has requested access to my financial statements before our initial meeting. Is it standard practice to provide them with this information at this stage?

Indeed, it’s a common practice to share financial details about your company with a potential buyer before scheduling a face-to-face meeting, provided that both parties have signed a non-disclosure agreement to ensure confidentiality.

However, if you’re still concerned about safeguarding sensitive information from falling into the wrong hands, such as competitors, there’s a strategic approach you can employ – the “phased release” method.

With a phased release, you provide information to the potential buyer incrementally. As the buyer demonstrates a sustained interest in your business, you gradually release more comprehensive data, reserving the most sensitive financial information for a later stage in the process.

While a phased release doesn’t offer an absolute guarantee against leaks, it does provide a level of protection against casual inquiries.

For further insights on sharing financials with potential buyers, including a comprehensive look at the phased release strategy, please refer to the following article.

Send Adjusted Financials Before Meeting

The standard procedure for most M&A intermediaries and business brokers involves furnishing potential buyers with a package of normalized or adjusted financial statements prior to any in-person meetings. This essential step offers prospective buyers insight into the company’s current financial performance. It’s worth noting that virtually all reputable business brokers and M&A intermediaries mandate the execution of a non-disclosure agreement as a prerequisite for accessing these financial records.

Use a Phased Release of Information

However, if confidentiality is a paramount concern, opting for a phased release of information is your best course of action. This strategic approach involves unveiling information in distinct stages throughout the sales process, with the most sensitive data reserved for later phases.

In practice, you can begin by providing a summary of key information in the initial stages. For instance, when a buyer expresses interest in your business, you might share a concise snapshot of your financial statements via email. This initial summary could encompass essential details like gross sales, gross profit, and SDE/EBITDA figures for multiple years.

As the transaction progresses and the buyer’s commitment deepens, you can gradually release more comprehensive and detailed information. Typically, this transition occurs during face-to-face meetings, ensuring a controlled and secure sharing of sensitive data.

Screen Buyers in Phases

Implementing a multi-step approach allows for a smoother vetting process of potential buyers. Requesting extensive upfront screening can often deter or frustrate buyers. The solution is simple: adopt a phased approach, not only in evaluating the buyer but also in sharing information with them.

For owners who prioritize confidentiality, the most prudent choice is to embrace a gradual release of information.

We believe in fostering a fair exchange of information. Any buyer who declines to provide details regarding their qualifications to the seller may indicate a lack of seriousness or suitability for the transaction.

What Financial Information Should I Send to the Buyer?

Always provide normalized or adjusted financial statements, avoiding the sharing of raw financial data unless it’s entirely unaltered. Typically, most buyers appreciate receiving a comprehensive set of three years’ worth of Profit and Loss (P&L) statements. Additionally, furnishing a list of your monthly revenue spanning the previous three years proves beneficial, aiding them in identifying any seasonal or cyclical patterns in your business.

Our practice involves delivering the buyer meticulously prepared normalized financial statements. These documents include a common size analysis and details regarding percentage changes from year to year. Presented in a convenient spreadsheet format, our approach empowers the buyer to conduct their own in-depth analysis, make annotations, and perform insightful projections.

How to Screen Companies

When evaluating companies, it’s entirely appropriate to request essential documentation such as financial statements, references, a detailed buyer profile, a disclosure statement, and a comprehensive list of prior transactions. In this digital age, conducting independent research on key individuals involved in the process is also a prudent step. You can simply run online searches using their name, email address, or phone number, and even explore their social media profiles for further insights. For those with a more technical approach, extracting IP addresses from email and document metadata can provide valuable supplementary information. This multifaceted approach allows us to diligently assess individuals who contact us and raise any initial concerns, helping ensure a secure and trustworthy engagement.

Managing Due Diligence

Efficiently managing sensitive information is paramount. One approach is to maintain a dedicated, secure room or office within your home or business premises. This way, you can grant the buyer access to this controlled space without the need for making copies or transmitting sensitive data over the internet. Alternatively, a secure online data room hosted in the cloud can serve as a reliable repository. As trust and confidence in the buyer and the transaction grow, you may then consider providing hard copies of all pertinent information when appropriate.

Summary

To recap, a phased release of information is a prudent approach, particularly if you harbor any reservations regarding confidentiality. For any business owner, the safest course of action is to verify that you’re dealing with a qualified buyer who is genuinely committed to the acquisition and possesses the financial capability to see it through. Additionally, securing a confidentiality agreement before disclosing sensitive materials is a fundamental step to protect both you and your company from any unauthorized use of business information or intellectual property.

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