What is a Sales Memorandum?

A sales memorandum (“SM”), also known as an information memorandum, is created when a business is preparing to market itself for sale. An effective SM should give a potential buyer enough information to, usually after a meeting or two, decide whether they want to make the shareholders an offer to purchase the company.

Give away too much confidential information before having a firm commitment from the buyer and you risk it having a detrimental effect on your business but, give away too little and there could be limited interest or an undervaluation on the buyer’s part. The worst-case scenario is that the business is never sold.

A non-disclosure agreement should be put in place before distributing a SM to any potential buyer to help maintain confidentiality. Additionally, any highly sensitive pieces of information that aren’t necessary for an offer, but are integral to the performance of the business, can remain confidential until an offer in principle has been accepted, and due diligence has begun.

It is vital to strike a balance of information that enables the buyer to successfully assess the position of your business. Below are some, but not all, of the areas covered in a sales memorandum:

• Overview of the Business,
• Products/Services,
• Staff/Management,
• Location and premises,
• Financials, and
• Future opportunities.

The Benefits

When executed correctly, a sales memorandum has a number of key benefits that are important when trying to maximise value in the sale of a business:

• Combined with the right approach tactics, the SM could generate substantial interest in the business.
• Limits questions asked and can therefore;
  • Save time (and money), and
  • Provide greater credibility.
• Spending the time and money creating a SM shows a commitment to the sale process, which gives buyers confidence.
• Having a SM helps allow for a structured process, especially when there are lots of interested parties.
• It can help to filter out unsuitable buyers early on.

Preparing the SM takes place early in the process. The earlier it is prepared, the better, as it enables the company to be taken to market at the right time – a time that will provide the maximum value to the shareholders. Preparing it late and having to rush to market may mean that it has a detrimental effect on shareholder value. There is a quote from Benjamin Franklin that resonates here, “Failing to prepare is preparing to fail”.

If you have any questions or would like assistance regarding the sale of your business, it is never too early to open up discussions. Please do not hesitate to get in touch with your Barnes Roffe contact partner.