Jane received a call from one of her biggest customers. The customer had been in the process of putting together a large order that Jane thought would be her most important piece of business for the year. It was a fair deal – both sides would benefit.
The customer was calling to advise that they were not going to proceed with the order. Jane was stunned. Almost too surprised to even ask “Why”?
What she heard surprised her even further!
When pressed to explain, her valued customer indicated it had learned Jane was selling the business and that it had been told who the potential buyer was. The customer did not want to do business with that company and to avoid any issues for the customer, or for Jane, the customer felt it was best to decline ordering the equipment. The customer assumed Jane would understand and the customer did not want to jeopardize Jane’s potential for selling her business.
Jane learned a very harsh lesson – stakeholders who are aware of, and are impacted by, the potential sale of a business can negatively affect the sale and can create havoc for the owner trying to grow the business while attempting to sell it for the highest possible value. In Jane’s particular case she had shared her intention to sell with her key managers, believing it was a good idea that the managers knew what was happening in the company. Jane asked the managers to keep it confidential and thought they would honor her request.
What Jane hadn’t adequately considered was that those in the know don’t necessarily share her ability to keep it to themselves, or fully understand and appreciate the implications to the business by disclosing that the business was being sold. Stakeholders have their own agendas and reasons for doing what they do.
“How do I keep it quiet?” is one of the very most important questions asked by an owner who is contemplating putting her business up for sale.
Individuals who do not understand the business sale process or those who mistakenly think they are helping you by telling someone who they believe might be interested in buying your business, are most likely to breach sale confidentiality.
The most frequent sources for leaks are actually family and friends! Business matters are routinely discussed in family get-togethers or with friends who are confidantes. Family members and friends are often unaware of the negative repercussions of disclosing the intent to sell. The use of Twitter and other social media apps makes it even easier to inadvertently slip that the owner is selling the business. If the owner is intent on family and friends knowing about an intended sale, then family and friends must be made aware of the consequences of letting others know. An owner who considers disclosure of a pending sale a serious issue must weigh carefully the benefits of informing family members and friends.
Lawyers, accountants and professional advisors are not likely to tip their hand unless they have asked your permission to do so ahead of time. Maintaining sale confidentiality is a key success factor for their professional success and they are practiced in advising in confidence.
There are basically only two ways that your intention to sell your business can become known to anyone else – and that is YOU and your transaction advisor. Both consider sale confidentiality mission critical to the success of a transaction. Both are aware that public knowledge can have the unintended effect of decreasing the business value as a result of the uncertainty created.
A transaction advisor who does not have a very specific, proven process for controlling information is of no value to the owner. The transaction advisor is your key to successfully communicating your intentions to sell to only those who qualify as potential buyers for your business.
Your transaction advisor will introduce you to her process for maintaining confidentiality. Each situation is unique and must be adapted to your particular circumstances. An owner does not need to accept the confidentiality process introduced to them without asking for or demanding changes intended to minimize the chance of unintended disclosure.
Your transaction advisor will have interaction with your other professional advisors. While not a source of concern for breaching sale confidentiality, care must still be taken to ensure there is no unintended disclosure or talk that goes public. You as owner should have prior knowledge of these meetings/discussions if not in attendance.
“Who needs to know – and when?”
This is the basis for all decisions an owner must make regarding allowing access to the knowledge that the business is for sale or to the documents that are created and provided within the transaction process.
There are two sources of leaks: internal and external. Employees working closely with the owner can often sense something is going on. A new advisor, “a blue suit,” is an alert that needs to be addressed.
When acting as an advisor to business owners, advisors seek to find ways to continue to grow the business. Even when an owner is selling, growing the business remains a priority. Typically, an advisor asks to be introduced to staff as an advisor helping to identify and implement steps to help “grow the business.” Any issues related to growing the business are relevant in creating the strategy and documentation for selling the business.
There are steps that can be taken to minimize the form of interaction with your advisors. You can:
To the extent necessary, certain employees can be asked to sign a confidentiality or non-disclosure agreement which specifies the requirement to keep any knowledge of a potential sale to themselves. This should be a low key process, intended simply to reinforce the importance of discretion.
There are three important documents in the transaction process that provide opportunities to maintain sale confidentiality or to lose control of your intent to keep it confidential.
The teaser initiates the process of informing potential acquirers there is a business for sale that may be of interest to them. The teaser is intended to spark interest and a desire to learn more. There is no disclosure of the business name or enough specifics about the business to make obvious who the seller might be. Careful wordsmithing of this information is critical to masking the name of the buyer. A successful teaser generates a response from an interested party which moves the process to the first stage of disclosure – the non-disclosure agreement.
The teaser is issued by the transaction advisor, usually by email after phone conversation with the potential buyer to advise that a teaser, potentially of interest to them, is available for release.
The non-disclosure agreement (NDA) may be issued to an interested party without disclosing the name of the business that is for sale. The NDA is signed “blind” by the interested party, returned to the transaction advisor for approval and signing by the owner. The owner signs the NDA now discloses the company’s name for the first time. This process ensures that only signees to the NDA know who the name of the target company. An NDA, however, is often issued after the identity of the target is known by the potential buyer.
The NDA has usually been prepared by the seller’s attorney or reviewed by her to ensure the confidentiality intent of the owner is properly addressed and the terms and conditions of the non-disclosure are enforceable.
The transaction advisor informs the potential buyer about the process for moving forward, with the intent of ensuring the potential buyer is aware of the communication process to be adhered to and their limitations on access to information directly from the selling business.
Not every sale transaction will involved one but it is common for a CIM to be prepared to provide prospective buyers with sufficient information to generate a non-binding offer. Typically the CIM (or, “book”) will not include a purchase price for the business, but will provide the prospective buyer sufficient information to appropriately value the acquisition. It is extremely important for the CIM to clearly articulate all of the company’s attributes in order to fetch a premium valuation.
This stage of the process also moves only through the transaction advisor to ensure the potential buyer does not contact the seller directly. If further information is required it is the responsibility of the transaction advisor to assess that request and provide the information if appropriate. Requests such as customer lists, or information of a proprietary nature are not available at this stage of the process.
The risk of disclosing vital information to a buyer is highest risk subsequent to the receipt and signing of a Letter of Intent. This- the due diligence phase- is when the potential buyer seeks to confirm that the business is in the state as it was represented to be, in the CIM. The potential buyer will review the target’s financial records in detail and is likely wish to visit the business premises, talk to certain staff, and speak with customers and suppliers.
Your transaction advisor should have access to, and a process for, providing a “digital vault” (a/k/a electronic data room) for storage and access to documentation required in the due diligence process. This vault is well secured, with password access limited to approved parties. Compartmentalized security clearances are available for different types of information – sales, payroll, engineering, corporate governance, financial statements and tax returns. These ensure only those granted approval to the information have access to it. Further limitations can be placed on viewing only versus downloading. Each entry into the vault is logged and communication regarding the entry is passed on to the owner and transaction advisor. Password access for any authorized user can be removed by owner request.
The vault greatly reduces the need to visit the owner’s premises to acquire information required to complete the due diligence process. The information is requested by the transaction advisor early in the transaction process, as the advisor wants to be assured that the information will be available when it is needed. All of this may sound fairly complicated but there are a number of companies that provide electronic data rooms at competitive prices.
An owner has many things to consider when addressing the need for sale confidentiality. The best source of information is her transaction advisor – as the transaction advisor has dealt with this concern continually in her transaction engagements and have had success in ensuring even the most public of companies are sold without prior public knowledge. The process utilized by the transaction advisor will provide peace of mind to the owner if clearly understood and practiced.
Doug Hyland is a principal of ROCG, managing the Toronto, Canada office. He is a recognized expert in the area of transition planning for business owners and their families, a frequent speaker and contributor of articles outlining the unique challenges business owners experience readying themselves and their businesses for exiting on their terms. Doug assists…
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