[Question] What financial information is a potential investor entitled to?

[Yaku]

Good afternoon

I have a question about the type of financial information and manufacturing processed I have to show a possible investor.

Not long ago I was approached by a corporate finance institution and offered capital for a share of my business. As I get these type of offers all the time, of which none of them are serious, I asked the investor to put his offer in writing. He has since done it and now wants to see all my financial documents and processes I use to manufacture my products before proceeding with the capital investment.

The problem I have is that he has already made it known to me that he might approach my compition and invest with them, or alternatively start his own factory. Since his offer isn't binding to any party I fear that he is using this as a paper excersice only to get to know the finacial status of my business and learn trade secrets in order to improve his own manufacturing procrsses.

Naturally I'd like someone to invest in my bussiness and therefore, if the offer is real, I'd like for the investment to proceed. What I don't want is to show my inner workings to a potential competitor.

What information am I obliged to give to him and how can I safeguard myself from giving trade secrets to a potential competitor?

Kind regards
Jaco

[Justloadit]

Usally in a situation like this, the investor must first sign an NDA.
This still does not stop him from using the information gathered.

I suggest you get a business broker in who will manage the investor and limit the information to the investor.

[Yaku]

Thanks, I think a broker should be part of the process, can you recommend one in the CT area?

[flaker]

Thanks, I think a broker should be part of the process, can you recommend one in the CT area?

I beg to differ on the choice of a broker in place of a commercial attorney ,but most certainly not a broker.

Try PMing members as Greig Whitton,Clive Triangle, Legal Stern for their input

[Justloadit]

Note that a good broker will also be able to value your business, and you may be under valuing your business, where as an attorney will only handle the legal issues

[Greig Whitton]

What information am I obliged to give to him and how can I safeguard myself from giving trade secrets to a potential competitor?

You're not obliged to disclose anything. This is a private negotiation: the investor can request anything; you can deny everything. It's entirely up to the two of you.

As Justloadit pointed out, you can insist on a NDA but, frankly, it probably won't be worth the paper it's printed on. Unless you have very unique IP, enforcing a NDA is going to be very difficult (and expensive ... and time consuming). The best way to protect your trade secrets is to keep them secret.

That this investor has already disclosed a willingness to approach your competitors or start their own factory should be serious cause for concern. And the fact that this is a corporate financing institution and not some Joe off the streets should amplify that concern.

In situations like these, my advice is simply this: trust your gut. Don't be blinded by the money.

[CLIVE-TRIANGLE]

That this investor has already disclosed a willingness to approach your competitors or start their own factory should be serious cause for concern. And the fact that this is a corporate financing institution and not some Joe off the streets should amplify that concern.

My thoughts exactly. Perhaps it is just the way it was written; but to me it's a poorly veiled threat.

That aside, an investor in an existing enterprise would normally be interested in a ROI and would have no interest in the production processes. On the other hand, if he is considering investing primarily because the company owns unique technology or processes, then it's another matter entirely, because that is what he is buying into.

I guess it's the old story of the devil is in the detail.

Consider also that making information available, without suitable reservations, is tantamount to an implied warranty, whether technical or financial.

Do not do this without a commercial attorney preparing the necessary, would be my advice.

[pietpetoors]

He can sign a NDA but if he uses your info to start his own factory, he does not disclose anything, he uses it himself.

[HR Solutions]

Put yourself in his shoes if you were investing - you would def want to see his books. You would want to know turnover, creditors, debtors etc. I reckon if he looked at that to start off with and was still interested then he would want to see more. Its a difficult one, and you still need to protect trade secrets, but you also have to be careful of him seeing your client base etc etc etc and then running off and start his own business. It sound like you don't know this "investor" which is also a bit of a problem because as you said you get these "offers" every day especially via e mail. Be carefull.

[Dave A]

There is a reason why there is a due diligence stage. At this point the purchaser is committed to an offer provided that everything checks out. Essentially it gives the buyer the opportunity to verify all the promises and assurances of the seller.

[mosescapetown]

We just had the same situation with one of our clients. He is also in manufacturing.

The investor also required the following
1- a due diligence
2- latest audited statements
3- 3 year cash flow projection
4- Proof of brand registration
5- Supply agreements
6- Listing agreements
7- Debtor and creditor books
8- business plan stipulating the future expansion of company

There might have been more request i cannot remember of hand I will edit if i missed anything.
Point is we also immediately advised the client to not give any info that we did not check or approve with him. For the same reason as mentioned by Yaku. Our client also had allot of IP and recopies as part of the brand so naturally that will also not be disclosed before the investor bought (and paid for) shares. And even then some stuff will not be disclosed. (recopies and blending tricks etc, ect). We also did a due diligence on the investor before giving any information. This was to ensure the investor was legit and not hunting for trade secrets only (as happens often in the trade)

Making a long story short. We assisted the client in preparing and presenting the requested paperwork and of coarse getting the necessary NDA's in place. (not that they mean much) taking care not to say too much but also say enough to satisfy the investors need to asses properly.

lastly... and sorry if i step on any tows. DO NOT use a broker in this process. getting a valuation can also be done in several ways. use an Attorney for the job and one that knows and understand company law and business practice. A bonus will be one that knows tax also.

Armed with a good lawyer and auditor you will be guided through the process without pain and loss. it will also protect you against the business pirates out there.

My 2 cent