Written By: Doug Hyland
John got a call from one of his biggest customers. They had been in the process of putting together a large order that John thought would be his 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. John was stunned. Almost too surprised to even ask “Why”?… What he heard surprised him even further!
When pressed to explain, his valued customer indicated they had learned John was selling the business and that they had been told who the potential buyer was. They did not want to do business with that company and to avoid any issues for them or for John they felt it was best to decline ordering the equipment. They assumed John would understand and they didn’t want to jeopardize his potential for selling his business.
John 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 with attempting to sell it. In John’s particular case he had shared his intention to sell with his key managers, believing it was a good idea that they knew what was going on. He asked them to keep it confidential and thought they would honor his request.
What John did not adequately considered was that those in the know don’t necessarily share his ability to keep it 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 Owners who are contemplating putting their business up for sale? Owners, generally, are paranoid about the word getting out and about how the transaction process works without it becoming known to employees and other stakeholders.
Who is most likely to disclose your intent to sell to the wrong person?
Individuals who don’t 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 confidentiality.
The most frequent sources for leaks are actually family and friends! Business matters are routinely discussed in family get together 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 has made it even easier to inadvertently let it slip that the Owner is selling the business. If the Owner is intent on family and friends knowing about an intended sale, they 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 confidentiality is a key success factor for their professional success and are practised 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 confidentiality mission critical to the success of a transaction. Both are aware that public knowledge usually has 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 their 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 adviser will have interaction with the Owner’s other professional advisors. While not a source of concern for breaching confidentiality, care must still be taken to ensure there is no unintended disclosure or talk that goes public. The Owner should have prior knowledge of these meetings/ discussions if not in attendance.
“Who needs to know – and when?”
This 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.
The role of the Advisor:
ROCG acts as advisors to business Owners seeking ways to Grow their business. Even when an Owner is selling, growing the business remains a priority. We ask that we be introduced to staff as advisors helping to identify and implement steps to help “Grow the Business”. Staff then understand the nature of the relationship and the types of questions that they may be asked. Any issues related to growing the business are relevant in creating the strategy and documentation for selling the business.
Communications with Advisers:
There are steps that can be taken to minimize the form of interaction with your Advisors. We discuss and often recommend:
- The Owner creates a separate email address used only for communicating with the advisors;
- Use of a cell phone or separate phone line rather than the office or business line;
- Off-hour or off-site visits by the Advisors;
- Restricted use of staff in Owners office – accounting in particular. The Advisor requests information, records and documents in writing (not through the separate email address) to the Owner which supports the “Grow your Business” engagement
Staff in the know
Employees can be asked to sign a confidentiality 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. It is unlikely to have force in law unless there was clear intent on behalf of the employee to breach the confidentiality agreement they signed.
There are three important documents in the transaction process that provide opportunities to maintain confidentiality or to lose control of your intent to keep it confidential.
1. Information sheet (Teaser)
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 who 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 them that a Teaser, potentially of interest to them, was available for release. In some circumstances, the name and location of the transaction advisor is formatted to ensure the name of the Transaction Advisor does not of itself indicate who the seller might be.
2. Non-disclosure agreement (NDA)
The NDA is issued to an interested party without disclosing the name of the seller. The NDA is signed “blind” by the interested party, returned to the Transaction Advisor for approval and signing by the Owner. The Owner signed back 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 selling party.
The NDA has usually been prepared by the Owner’s lawyer or reviewed by them to ensure the confidentiality intent of the Owner is properly addressed and the terms and conditions of the non- disclosure are enforceable in the jurisdiction stated in the NDA. 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.
3. Confidential Information Memorandum (CIM)
The CIM provides a prospective buyer with sufficient information to generate a non-binding offer. Typically, the 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.
An area of highest risk occurs subsequent to the receipt and signing of a Letter of Intent. At that time, the buyer seeks to confirm the purchase price, terms and conditions through conducting due diligence on the Company. The buyer may wish to visit the business premises, talk to certain staff, and speak with customers and suppliers as well as going through the financial records of the company in detail.
Your transaction advisors should have access to and a process for providing a digital vault 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. The information can be requested in conjunction with the Grow the Business engagement if internal confidentiality is an issue for the Owner.
An Owner has many things to consider when addressing the need for confidentiality. The best source of information is their Transaction Advisor – they have dealt with this concern continually in their 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. Creating maximum business without jeopardizing ongoing business relationships and opportunities to grow the business is the successful outcome with a well-managed confidentiality program.