As a seller, it is easy to become paranoid about the various ramifications of other people hearing that your company is for sale… especially employees, customers, vendors and competitors. In my opinion, sellers are generally overly concerned about the breach of confidentiality, which if it occurs is apt to happen at the end of the selling process… too late to cause serious damage.
Facing Reality
If you want to sell your company by attracting the strongest potential buyers who will offer you the best deal in terms of price and structure, then you should consider the following: – confide in a few of your top managers, especially the CFO – contact on a confidential basis most of the industry players including some competitors – release an Offering Memorandum to potential buyers, after a confidentiality agreement has been signed, which will disclose a substantial amount of confidential material on your company – allow some potential buyers to walk through your premises and operations during working hours – provide access to some of your more important customers and vendors as part of the due diligence process prior to the final signing of the Purchase & Sale Agreement.
Breaking Down the Barriers
For those of you sellers who are already paranoid after just reading the paragraph above, let us discuss each of these points. – Assuming you have a company with several million dollars or more in sales with a financial officer or controller, it will be difficult to pull all the financials together without enlisting the confidence of a few key people in the company. One way to enlist their faith and loyalty is to confidentially tell them your plans, tell them of your need to secure their cooperation and offer to reward them with three or more months of additional salary if they stay with you through the closing. Alternatively, you could offer them phantom stock in the company so they would participate in the equity. Another approach is to tell your key people that you are planning to recapitalize the company by selling some of the equity so that the company has the necessary capital to aggressively grow the business.
– Contacting the industry players which are potential buyers should be done by a
third party such as an investment banker so the identity of your company is not
identified until a confidentiality statement is signed by the buyer and approved by you the seller.– The buyer needs to have enough information on the company in the form of
documentation to determine whether he wants to proceed and to be able to present
a price range prior to a visit with management. The process is to boil down the
best candidates to just a few. The seller may choose not to show this Memorandum
to some of the closest competitors. The critical part for the seller is to enforce
a strict timeline on the process so that the shorter time period the Memorandums are
“out and about” the better. Therefore, a request for a price range by interested buyers
should be within a month, with expectations of letter of intent, purchase & sale agreement
and final due diligence to consume no more than three more months until closing.– When it comes to walking prospects through the company facilities, I would hope that
over the years there have been numerous customers, insurance agents and bankers who have
also walked through. In any event, buyers want to see a “going concern” and not a flashlight tour at night.– The final consideration of whether you should allow the buyer access to some of
your key customers and vendors should only be done at the last possible moment, prior
to closing, and should be done on a case by case basis. Alternatively, if the principals
of the acquirer are forbidden to speak to the key relationships to be sure the business will
remain intact with the new entity, then due diligence firms are often retained to conduct interviews.
Specifically, the due diligence firm will call under the aegis of conducting a marketing survey to measure
the satisfaction of “their client” which of course is the undisclosed potential buyer. While the seller
may abhor letting the buyer exercise these privileges, sometimes there is no choice. In other words,
if the buyer absolutely insists on conducting this type of due diligence, particularly if you, the
seller, has a certain degree of customer concentration, then you must concede or find another buyer.A Case of Paranoia
A number of years ago I was retained to sell a “print-on-demand” printing company with annual profitable sales of $7 million. At the time, selling prices for printing companies were stable because consolidation in the industry was very active. The owners had decided to sell, because they were burnt out and wanted to extricate themselves from the company’s debt in which they had personally signed. The owners had sold the company some years earlier, but after the buyer reneged on the notes, the owners repossessed the company. Naturally, the owners had a distaste for the mergers and acquisitions process and viewed me as their new investment banker with a certain amount of skepticism.
As I commenced the selling process with the printing company, I could sense the nervousness and apprehension of my client. Initially, I could not call the principals at the office and we had to meet “off campus.” It wasn’t until later on that they established my presence as the company’s consultant. In spite of my clients’ paranoia, they ironically were in the process of selling their building to payoff their mortgage and had installed a huge sign on the premises: “Building For Sale.”
While the printing industry is huge with an estimated 37,000 printers nationwide, the obvious buyers for small printers, such as my former client, are those located in the immediate region. Reluctantly, and somewhat stupidly, I let my client exclude about two dozen other printers who were considered too close a competitor for me as an investment banker to contact. As the story unfolds, I mistakenly called the ABC Printing Company, an alias name, which was one of the companies excluded from the target list of potential buyers. Part of my problem was that ABC had changed its name, and I had failed to make the connection. While I received a blind confidential agreement that was signed by ABC, the CEO of the latter had guessed the name of my client. I flatly denied the identity.
As the story continues, I told my client of the events and when he heard of my mistake, he went absolutely ballistic. He called his attorney, and I was immediately fired and the assignment was turned over to my partner. Still, at this point, ABC did not know for sure that I represented the company which he had guessed was for sale.
My partner wisely convinced our client to swallow their pride and meet with the interested buyer. After numerous meetings and extensive negotiations, my former client sold the printing company to ABC. In fact, ABC was the only company that made an official offer. What a turnaround of events!
From this experience of a paranoid seller, one can learn several lessons: – do not be too restrictive on which buyers can be approached as it could limit the possibility of a successful transaction. – mistakes do happen on matters of confidentiality, so it is very important to keep one’s “cool.”
A Breach of Confidentiality
Quite a few years ago, I was retained to sell an office supply manufacturer. The company with $10 million in sales was nicely profitable, but it had a customer concentration problem which scared numerous potential buyers.
After an extensive search for acquirers, I finally identified another office supply manufacturer with sales of $50 million which was very interested in my client. The buyer signed the traditional confidentiality agreement and before long it appeared that there might be a deal. For some unknown reason, the CEO of the acquirer felt that it was a “done deal” even though there was no signed letter of intent, much less a signed Purchase & Sale Agreement. At this point, the CEO started to talk to other people in the office supply industry about their pending acquisition… specifically by name.
When my client heard about this blatant violation of confidentiality, he immediately withdrew the company from the market. My client was tempted to sue the former potential acquirer, but in this type of situation, the plaintiff has to prove damages such as loss of orders, loss of employees, etc. To my knowledge, there were no losses.
Over a year later, our client was still withdrawn from the M&A market, but was resolicited by a $125 million competitor. By now, my client’s sales had increased to $18 million. Fast forward, my client sold for about twice the price it was offered previously, and everyone had forgotten about the devastating breach of confidentiality some time before.
From this experience, we can appreciate that even though confidentiality is breached, the game is not over. In fact, in this case, the selling company was extremely lucky, for it sold for considerably more money in spite of and because of the confidentiality breach.
Losing a Key Employee
One of the first companies I sold as an investment banker over fifteen years ago was memorable because I was fortunate to overcome adverse circumstances.
My client was a hydraulic press manufacturer producing Reaction Injection Molding machines for plastic parts. Most of the orders were received from the Big Three U.S. automobile companies. Unfortunately, the auto companies refused to pay progress payments on these $250,000 machines so as business increased, there was insufficient working capital to meet the delivery dates. As a result, the owners decided to sell their company.
I was retained to represent the seller, and, of course, I drafted an Offering Memorandum. In the memorandum, I developed an Organization Chart of all the employees, supplying the actual names of the senior management team. Later, I went to market and contacted other plastic machine manufacturers both in this country and Germany. None of these companies were interested in making an offer, so I decided to contact other companies which used hydraulics as its core competency. Fortunately, I identified and qualified such a company that was interested in acquiring my client. Negotiations broke off and months went by without further communication. Then the acquirer in a clandestine manner hired my client’s chief engineer and hydraulic expert whose name was specifically documented in the Offering Memorandum. The situation was very gloomy because there were not only no remaining buyers, but the company’s most important technical expert had been stolen by one of the potential buyers. But then, without warning, the previous buyer re-entered the picture with a satisfactory new offer and miraculously the company was successfully sold.
From this experience, we can appreciate that while there are often upsetting episodes in the process of selling a company, it seems that eventually the situation is remedied. Fortunately, this story had a happy ending also.
My experience is that owners are overly concerned with confidentiality and that it is a myth that in the selling process you will lose customers and employees. On the other hand, you should be very careful regarding confidentiality. The following suggestions should be considered.
1. Realize that there is a “Catch 22” between keeping the selling process totally
confidential and contacting numerous potential buyers in order to create a
hotly contested bidding process to secure the best deal. The more companies
you contact, the greater the risk for a leak. The critical aspect for maintaining
confidentiality is to keep to a fairly short timetable, moving forward to a closing
as soon after the Offering Memorandum has been released as possible... maybe four
months total. Don’t let the process of selling a company drag. There is always a
chance of a leak that the company is for sale, but hopefully the deal will be completed
before there is serious damage.
Conclusion
Not all the possible mistakes in selling a company will happen and mistakes that happen
are seldom devastating. Fortunately, the adverse myths in selling a company are never realized.Alternatively to the above scenario is to go to only one or two buyers to reduce the risk of a
leak, but realize that doing so also reduces your chances of obtaining the best price.2. Create a reasonable story that you can tell the employees as to why there will be strange
people walking through the facilities from time to time. For example, you could say that
you are recapitalizing or refinancing the company in order to grow it more aggressively,
such as adding new product lines through an acquisition. If you decide not to use the above
explanation by using a “smoke screen,” then at least be prepared to have an answer if someone
confronts you with the question: “Are you selling the company?” Aside from the above explanation,
another way to respond is to say that if you are approached by someone like General Electric, you
have to consider your options.3. If you are preparing to sell your business, you should prepare a war-room, or more specifically,
numerous secured file drawers containing all the pertinent information needed by a buyer’s due
diligence team. Such items would include all legal documents, contracts, leases, financial statements,
patents, alliances, etc. If you accumulate this material over several months before you contact buyers,
then you will not be scrambling around at the last moment causing suspicion with the office staff.4. Retain a third party intermediary such as an investment banker to act as a buffer to channel all
information between the buyer and you, thus reducing the potential of a confidential breach.5. Condition the employees to seeing strange people (buyers) walk through the facility, by very
early-on in the selling process having other unrelated people, such as customers, vendors, bankers,
etc., walk through the facility.6. The investment banker will need to communicate with you on almost a daily basis, particularly when
the buyers need numerous questions answered. Therefore, you can not encumber the selling process by
restricting the free flow of information via telephone, email or fax. Perhaps all telephone conversations
could be done by cell phones, or all faxes to your private fax. When using email, be careful that a slight
mistake by the sender doesn’t send the message into a general company mailbox, which might be picked up by
the MIS manager. For example, if the email address is rrobb@atlantic.com and the sender uses
robb@atlantic.com, it will go into the general mailbox which could be initially seen by the wrong person.7. Constantly remind buyers of the importance of confidentiality. Signing the confidentiality agreement
is essential, but verbal reminders are also important.8. And finally, get organized! You will have a lot of paperwork, documents, memoranda floating around
your desk and office. Place them in three-ring binders and lock them up or lock your office door.