Maintaining confidentiality is extremely important in mid-market deals, but I find many business owners to be overly sensitive about releasing company information when selling a business. Limiting the release of necessary information to the market can impede the effectiveness of the sale process and, more importantly, negatively impact the purchase price.
The process for maintaining confidentiality does not remain static throughout the entire time frame of selling a business. From my experience, protocols for maintaining confidentiality will change depending on the stage of the sale process and the types of buyers to which the information is being disclosed. The risk of disclosing proprietary information, or too much information in general, to a private equity firm carries less risk than disclosure of the same information to an industry competitor.
The appropriate level of information to disclose should be re-examined at the following three separate stages of the sale process:
Confidentiality During the Marketing Phase
In broad strokes, the duration for the marketing phase in a sale process is from the time the investment banker is engaged to the point of outreach to the market. During this phase, the major activities include the selection of an auction process (negotiated vs. targeted vs. broad), development of a prospective buyer list, preparation of a teaser and creation of a Confidential Information Memorandum (CIM).
Many investment bankers (including myself at one time) recommend that companies follow a targeted auction process of approaching 10–25 strategically selected buyers. This type of process is thought to improve the ability to maintain strict confidentiality and minimize information leaks. I have since changed my view on this approach because, regardless of how much research is performed, it is impossible to create a list of all logical prospective buyers that might have interest in your business. Methods to uncover covert buyers in the marketplace must be utilized if the owner’s objective is to maximize valuation.
One of these methods is to communicate high-level company information to a wide marketplace. When going out to a broad market, just enough information is provided to pique the interest of a would-be buyer. The teaser used to solicit interest from prospective buyers should be so nondescript that it would be difficult to determine with any certainty who the subject company might be. Even if there is any inclination regarding the name of the company for sale, it would be pure speculation on the part of the prospective buyer at this point in the process.
Once prospective buyers come to the surface, it can be determined which parties will be permitted to continue in the sale process. Not everyone that expresses interest in the opportunity needs to be invited to the dance!
Confidentiality During the Offer Solicitation Phase
Once non-disclosure agreements (NDAs) are executed, the CIM is distributed to the identified prospective purchaser, so that they can make an educated decision on whether or not they want to pursue an acquisition and, if so, on what purchase price and terms. The CIM should contain enough information related to historical and projected financial statements, management team members, industry dynamics and growth prospects to make these decisions. From my experience, if a prospective buyer is seeking a significant amount of additional details before providing an initial indication of interest (IOI), purchase price and terms, then they are likely inexperienced deal-makers or just kicking tires. I would politely ask for an IOI before providing any additional pieces of information or just exclude these parties from the sale process all together.
As an example of this, my firm was recently engaged on a transaction where a competitor inquired on a teaser that was circulated to the broader market. This competitor was not on our initial prospective purchaser list and the vendor was hesitant to disclose to this party that their company was in the market. As such, we executed an NDA and provided, on a no-names basis, only sufficient financial and corporate information for the competitor to make an offer. It turned out that the competitor was only kicking tires, but no harm was done by exposing detailed information that could give away the name of the company for sale.
Confidentiality During the Due Diligence Phase
After a letter of intent (LOI) is signed, the prospective purchaser will enter into confirmatory due diligence. This is when the acquirer digs deeper into the operations of the business. At this point, you and your M&A advisor should have already confirmed the purchaser’s interest, capability and financial wherewithal to complete a transaction on terms acceptable to the vendor and its shareholders.
The information request list for due diligence will be long and arduous. Most of the information required will be a reasonable ask to satisfy the purchaser’s stakeholders, including higher level management, board of directors and financial lenders. The vendor should be weary of re-trading by the prospective purchaser when flaws are identified during due diligence. It is my opinion that material changes to the terms of the LOI should only occur if there are material changes to the vendor’s business.
Where things get dicey for the vendor is when they are asked to include outside stakeholders in on the conversation. This might include employees, customers and suppliers. Of course, the vendor wants to ensure that the deal will close before introducing the buyers to these parties. On the other hand, the purchaser needs to have conversations with these parties before stroking a huge check. Deal tactics such as purchase price deposits or break-fees can be introduced at this point to compensate for the risk of disclosing information that can disrupt operations if a deal is not consummated.
In other instances, business-critical information may never be disclosed prior to closing a transaction. For example, on one deal prior to closing, our team refused to disclose the inner workings of a vendor’s intellectual property to a prospective buyer who was also a competitor. The prospective buyer was able to test the efficacy of the product extensively, but they were not permitted to know the details of the secret sauce until the deal closed.
Increase Your Chances of Maximizing Price
Initially, marketing the sale of your business as widely as possible brings the best chance of finding the best buyer that will be willing to pay the highest price. Fear of potential confidentiality breaches in the sale process should not be a deterrent in bringing the best prospective buyers to the table. Managing information released at different stages and to various buyer types will reduce the possibility of critical business information leaks.