Managing Confidentiality During the M&A Process
When we talk to business owners thinking about selling their company, there is always a discussion about confidentiality. We take several steps to ensure that our process is discreet. A potential buyer would rarely share confidential information, especially since they are under a non-disclosure agreement (NDA).
That said, business owners still have legitimate concerns. Some of these concerns include:
This can create several problems, from demotivating employees worried about their future to having the deal held hostage by a key employee who wants “their share” of the transaction.
2. Customers could find out.
The risk here is that a customer may reduce the business they do with you. Most deals are valued based on multiples of revenues or EBITDA, so reducing business pre-close would be painful. For example, if you have a $1 million loss in revenue, and your transaction value is 6X revenues, your price has just been reduced by $6 million.
3. Competitors could find out.
If competitors hear a rumor that you’re selling your business, they can and most likely will use that against you, which may cause revenues to decline.
Our goal for each client is to create an “auction” for their business. In an auction process, hundreds of buyers (or more) look at an opportunity in a short timeframe. We’ve developed a system to manage confidentiality during the go-to-market phase. The challenge for us is to create a buzz about how great the opportunity is for buyers without disclosing too much.
Key Stages in Managing Confidentiality During the M&A Process
Stage 1 – Initial Buyer Outreach
In the first stage, we work with you to develop a list of potential buyers. These are financial (such as private equity firms) and strategic targets, who often are competitors. Contacting competitors can be tricky. Even sharing a limited amount of information with them may tell them your business is for sale. If you aren’t comfortable with any level of contact, we take the competitors off the list. The output from this process is the official “no contact” list. We won’t contact anyone on this list unless you change your mind later.
We then send a teaser, a 1–2-page document, to a group of buyers you approve. The teaser doesn’t mention your business’s name and may even generalize other details that could lead to identifying your company. For example, if your business is in Portland, Oregon, we would say “West Coast” in the teaser if you think Portland is too specific. Before we send out any teasers, you will approve all content the potential buyers will see.
Stage 2 – Working with Interested Buyers
In the second stage, we’re distributing the Confidential Information Memorandum (CIM) to buyers who have expressed interest after reviewing the teaser. Before we send a CIM, we qualify each buyer and have them sign an NDA first. We use a standard ACT NDA on all deals, which provides consistency and speeds up turnaround times.
If there are any modifications to our NDA, we get that approved by you first. This method of handling NDAs allows us to move things along more efficiently. In some cases, the buyer will want to use their own NDA. If so, you would sign an NDA directly with the buyer. However, we typically try to discourage this, as it tends to slow down the process.
Next, we give the buyer an “Indication of Interest” deadline for when they will provide us with their non-binding first offer. We typically allow 3-4 weeks for offers to be submitted.
After the buyers submit their offers, you pick the best and then enter into an LOI (Letter of Intent). The LOI is an agreement between you and the buyer and has its own confidentiality terms. The LOI confidentiality supersedes what we signed with the buyer at that point. The unsuccessful buyers are still subject to the terms of the original NDA.
Stage 3 – During Due Diligence
At this stage, you will have chosen your ideal buyer. As part of the LOI, new confidentiality terms will be agreed to by both parties. Your attorney will assist in revising the new confidentiality terms and make sure you are comfortable with them. The primary concern during this stage is that your employees will discover a transaction is in process. Other parties of concern are customers and vendors.
For employees, it’s good to choose a very small group of key people who are helping you with the transaction. They will know not to share what’s going on with other employees. Buyers can conduct site visits after business hours, and meetings can be held offsite.
The Benefits of a Fast Process
One of the best ways to keep your sale under the radar is to do it as fast as possible. Our Auction Process removes several months from the typical M&A timeline. You can create urgency when you have multiple simultaneous bidders on your business. After you’ve received multiple Indications of Interest, we’ll often have a signed Letter of Intent within weeks. In addition, when buyer activity is competitive, you can reduce the length of due diligence. For example, you may choose a buyer willing to limit due diligence to 30 days. This would be included in the LOI and can be a binding commitment. The shorter the due diligence, the less time they will have to find problems that require evaluation and consume time.
Managing confidentiality is key to having a successful exit for your business. The longer your company is on the market, the more likely it is that word will get out that you are for sale. A fast process will reduce the odds of word getting out. If you want to sell your company, make sure you develop a confidentiality plan with your investment banker. Having a plan will be one less thing to worry about during this demanding but rewarding time of your life.
About the Author
John Norton is a Managing Director for ACT Capital Advisors in Seattle, WA. ACT advises sellers on achieving the best possible outcome when they decide to exit. John leads the Technology Group at ACT and has had multiple successful exits as a business owner. John can be reached at firstname.lastname@example.org .