Income Statements in an M&A Offering Document
The Indication of Interest Means Progress in an M&A Deal
Terms and Conditions in an M&A Letter of Intent

M&A Offering Document: Financial Projections

Ideally, an M&A offering document should have five years of projections. That’s a lot of work, especially when projections are taken with a grain of salt, but Buyer should be able to get a good sense of where you think the company is headed.

Your projections should include a narrative explaining the assumptions you used to create them. For example, explain your rationale for revenue increases and how expenses are related to those revenues.

Achieving the projected numbers is imperative, so you’re much better off to project low growth and beat that projection than to project rapid growth and fall short. You’re sure to create problems for yourself if you pad your projections to an unobtainable level. Not achieving those higher projections often leads to a lower sale price.

Plus, Buyers are on the lookout for overly rosy projections and may discount projections that the historical financials don’t support.

Another important figure in the projections is CAPEX. CAPEX (short for capital expenditures) occur when a company makes some sort of investment in itself. Instead of immediately expensing the expenditure, thus reducing profits by the full amount of the investment, a company may be able to capitalize the expenditure and write off the expense over a period of time.

Examples of CAPEX include anything that will be used for a long period of time: computers, software, furniture, improvements to the facilities, manufacturing equipment, and so on.

For example, say a company pays $1 million for a piece of equipment with an expected useful life of ten years. Writing off the full cost of the equipment in year one doesn’t make sense because the equipment will be used for nine more years. Instead, the company writes off the amount of the equipment used each year, or $100,000 per year. This write-off is called depreciation.

Because annual capital expenditures are not captured in the venerable EBITDA (earnings before interest, taxes, depreciation, and amortization) calculation, Buyers should take a close look at a company’s CAPEX needs to fully understand the true cash flow of the business.

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M&A Offering Document: Historical Financial Information
Basic Information in an M&A Indication of Interest
M&A Letter of Intent: Valuation and Deal Structure
M&A Offering Document: Description of the Market
Include Seller's Reasons for Selling in an M&A Offering Document