Black_Book

Several years ago, I finally (and reluctantly) admitted to myself that our second-generation family manufacturing company of 46 years would be sold. It was debt-free, extremely profitable but ripe for transition for all the classic reasons, including two owner/managers more than 55 years old. I stopped living in denial and confronted reality.

As I wrote in my recent article for PROFITguide.com, the eventual success in selling our business was enormously enhanced because of the material in my Black Book, which included a table of contents with 21 tabs containing the immediate answers to the predictable questions advisors and potential acquirors would unquestionably require. This avoided the alternative—an administrative root canal! Our Black Book preparation took more than a year to pull together, and required methodical, detailed data accumulation. But the results were logical, informative, current and accurate—kind of like “staging” for a house sale.

The results increased the buyer’s salivating excitement and produced what I estimate was a premium sale price (exceeding 30%).

When a serious, credible and financially capable buyer surfaces, the process advances quickly. And time delays kill deals. A well-organized, responsive seller reflects similar optics for the “jewel” in the crosshairs—your business. Here’s what what my Black Book included:

1. A short history and overview of our company. This stated the incorporation date, ownership profile (including number of shares and percentage held), factory locations, industries served and major customers, employee overview, types of capital assets, quality record and industry recognition, ISO registration, our competitive advantage, stability factors, reasons why growth patterns would/could continue, type and profile of competitors, our debt-free condition, and when and why we would sell. We wrote this story in an articulate and passionate way that heavily emphasized the positive aspects of the organization.

2. Copies of audited financial statements for the past two years. Statements for many previous years had been unaudited because we were a debt-free, private company and the costs of an audit were unnecessary. Admitting that a company sale would undoubtedly happen within several years spurred me to start obtaining audits. When the time finally did come, they were absolutely necessary and instantly available. Also, I began to update this financial tab with our monthly unaudited statements, knowing that a sale could close at any month-end—not just our fiscal year-end.

Read: Entrepreneurs Share Their Exit Plans

3. Copies of the corporate tax returns, income tax assessments and source-deduction summaries for the previous two years. These forms from the CRA (Canada Revenue Agency) confirmed that there were no outstanding issues or liabilities with the tax department and that remittances were current.

4. A trade sales summary. This included a two-page story on each of our eight largest customers, which constituted 80% of total revenue. Including this supported the projected continued relationship that a new owner might have with these clients. Considering that we were a contract manufacturer of custom components and that, historically, 20% of our portfolio evaporated each year to obsolescence, this assurance of continuity was vital. Each summary defined when we started doing business with that customer, the nature of their business and why they used our product. We also included annual requirements, what percent we represented, our competitive advantage of quality and delivery (not price), how often we communicated with them, the frequency and success rate of quotations submitted, and the names of our competitors for that customer. For each of these customers, we also included our internally prepared profitability by SKU (part number), as well as year-to-date changes in sales by customer. These computer-generated summaries were easy to gather from our regular monthly reports.

5. Anticipated changes in existing customers’ future purchasing. We budgeted for increases with many major accounts. The related documentation outlined reasons, magnitudes, financial stability and growth patterns. But we anticipated some customers might buy less from us in future; this required expanded explanation—and we provided it. (For example, one customer had been sold and the new buyer had an existing source for our products; another customer had shifted a large volume of our work to one of our competitors to achieve cost savings). I knew it was imperative that these “bad news” scenarios be explained honestly and in detail. Failure to do so would create distrust of us by any potential buyer or leave us exposed for post-closing litigation—a business seller’s worst nightmare.

Read: An Entrepreneur’s Guide to Selling Your Baby

6. A list of our top 10 target customers. This David Letterman-style list outlined our top prospects for the next two years. This included company names, as well as the names of the purchasing agents, the nature and success of the customer, their current supplier of products similar to ours and the length of time those companies had been doing business together (and why). This list also included weaknesses and strengths of a target’s current supplier and some reasons why this relationship could change, as well as the number of sales calls and RFQs we had completed, any samples previously submitted and the current status of any pending orders.

7. Our written strategic plan (based on our continued ownership). This included the financial projection for two years, our marketing objectives, budgeted capital expenditures and expected changes in human resources.

8. A list of key senior personnel. This critical section included a one-page description of every member of our senior leadership team, including their name, position, educational background, current salary, length of service with our company and the reasons why they were successful in their position. Even more important, we included the reasons why we felt that each of these team members should remain with the company after the sale.

9. A summary of capital equipment owned by our company
. This included an asset description, purchase date, price paid, current condition and my estimate of current fair market value. These nine pages were simply details from our capital asset subledger, which we always kept current. As we got deeper in the process with the buyer who eventually purchased the firm, we were asked for an external independent valuation of these assets. The “independent” figure that came back was very close to my estimates.

10. A list of our IT systems. At the time, our computer system was excellent. It was up to date, well maintained, had only one database and was easily accessed by any of the 30 terminals in our facility on a password basis. There were 250 live work orders in process at any one time, and every job had related costing information. On a regular basis, for every work order, we compared actual cost to sales price to determine profitability in order to initiate early correction when required. The system also contained 10 years of historical financial and sales analysis, quotations, payroll and personnel data, budgets and quality-control records.

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