M&A Offering Document: Description of Product or Service

Sellers are not shocked to find that Buyer is interested in the M&A deal because of the company’s products or services. With that in mind, the offering document needs to provide plenty of information about products and services, including answering the following questions:

  • What is the product or service? What does the company sell? The offering document should provide details about this most basic aspect of the company. You may think this information is something Buyer should already know, but some of the people reading the offering document may not have been involved in the early discussions and therefore may not know anything about the company.

  • What is fueling growth? If sales are stagnant (or falling), what factors cause that? Providing Buyer with some insights as to market trends and challenges is important in helping Buyer understand the value drivers for a company.

  • Is any portion of the revenue recurring? Recurring revenue is often the holy grail for acquirers. A company with high percentage of revenue that recurs month after month or year after year may be able to garner a higher valuation than a company that starts each month at zero.

    You may also hear that a company scales very well. Scale can mean recurring revenue; in other words, after a salesperson has made a sale, she doesn’t need to go back and sell that same customer again and can instead focus on winning new customers. Scale can also mean very large sale prices.

    For example, a company that sells $1 million pieces of equipment probably scales better than a company selling a $10 widget.

  • Does the company experience any seasonality? In other words, are sales stronger during certain parts of the year and weaker in others? Buyer needs to know about seasonality so that it can plan accordingly. For example, companies with extreme seasonality may need a credit line. The company will tap the credit line during the slow season(s) and pay off the line during flush times.

  • How many product offerings does the company have? If the company offers a physical product (as opposed to a service), how many stock keeping units (SKUs) does it sell? A stock keeping unit is simply a number assigned to a specific product; the more SKUs a company has, the more different products it can offer its customers.

    A high number of SKUs can be a warning sign for Buyer because too many SKUs may mean the company is spread too thin or is stocking a lot of slow-moving inventory. Slow-moving inventory can be a waste of cash.

    Too many SKUs can also be an opportunity for Buyer because Buyer may be able to eliminate this slow-moving product and improve the efficiency and profitability of the company. What constitutes too many SKUs depends on each specific industry and each specific company.

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