By Steve Michaels
The following is an ongoing look at real life transactions in the TAS industry. These are two documented cases where either too much or not enough information was presented to a buyer:
Business A – Not Enough Information: The seller of this business filled out our listing sheet and furnished a P&L statement. Several buyers were brought to the table but the seller’s stipulations were that the buyer should sign a contractual agreement before doing a site visit or due diligence. In this case, we did have a buyer that was willing to agree to those terms but not without adding a clause to the agreement that permitted the buyer to withdraw his offer if due diligence proved the information provided was not accurate. The seller purchased this business over the last year so the background information was fairly recent. However, this is not the way to sell your business. I’m surprised that we were even able to get a buyer under these terms and conditions.
Business B – Too Much Information: After signing a letter of intent, the buyer went to the seller’s facilities for a site visit. Upon his arrival, the seller proceeded to give the buyer all of the documentation, including his customer list and DID numbers, not realizing that the letter of intent does not guarantee that there is a sale, only an intention to purchase. Luckily, the buyer was forthright in his intentions and the deal was consummated. Sensitive information such as the customer list should never be shared with a potential buyer. Your customer list is your ace in the hole in case the deal falls apart prior to closing.
Just Enough Information: When preparing to sell your business you should have several items ready for a potential buyer’s review and analysis. These include billing and revenue statistics backed up by bank deposits, because it is likely that the potential buyer would like to see your billing statistics on a per customer basis. (We recommend that you provide that information minus the client names and DID numbers.) You should also provide tax returns going back at least two years. You should provide at least two years’ worth of profit and loss statements along with the current year-to-date profit and loss statement. Providing a balance sheet for the current period may also be required in some cases. Providing call volume information by client (without displaying client names) is also a good idea. You can offer a history of client retention rates, reflecting churn rates for the past year. And finally, you should provide salary information for all key personnel.
When purchasing only the accounts, often the buyer will need the client information to put into his computer system prior to closing. Programming the client information prior to closing allows the buyer to begin servicing those accounts at closing. If however the client information is not released to the buyer until closing, then the buyer will need to keep the seller’s service in place while the data is transferred into the buyer’s system. This can be costly and risky since the seller’s operators may become aware of the sale and decide to walk away. We recommend that after the due diligence process is completed and the buyer has decided to move forward with the acquisition, a “Satisfaction of Due Diligence” document should be signed which states that the buyer has completed the due diligence process and is moving forward with the acquisition. The customer list is transferred at that time in order to program the customer data into the buyer’s system prior to closing. This allows the seller to switch the calls over to the buyer on the day of closing. The “Satisfaction of Due Diligence” document states that if the purchase is not consummated, the buyer cannot contact and or solicit the seller’s customers for a period of five years. If the buyer does contact and or solicit those clients he would then be required to pay for them at the multiple of the buyer’s original offer.
Sign the Contract and Get the Check: Another serious item that should not have to be stated is that you must sign the purchase agreement and get the check. We have handled two sales where the seller has neglected these two important items of the deal.
Steve Michaels and TAS Marketing have been serving the TAS industry in the mergers and acquisitions arena for over 23 years with over 220 businesses sold. His years of experience have widened his scope and experience in buying and selling businesses nationwide. He may be contacted at 800-369-6126, firstname.lastname@example.org, or visit www.tasmarketing.com.
[From Connection Magazine – June 2003]