Many sellers are deeply concerned over confidentiality in an M&A process, and rightfully so.
There are several stakeholders that need to be considered in this process, employees, customers, suppliers, lenders, and competitors to name a few. The M&A process is onerous enough for a company owner, having to explain a leaked deal to those stakeholders is never helpful.
Strategically, determining if to tell your team or which members of the team to tell in the pursuit of a sale is just as must be a strategic decision as it is a tactical one.
And while we, as investment bankers, have played many roles in the process: bankers, finance partners, insurance people, auditors etc. our job remains one of learning as much as we conceivably can about a company and its operations while maintaining confidentiality throughout the process.
That being said, while rare, we find 95% of confidentiality breaches come accidentally from within the selling company owners and sometimes employees. Therefore, a great deal of our early sale preparation is coaching owners and management teams on how to answer left-field questions such as “Oh, I hear you ware for sale”, which may or may not have stemmed from a sale process, perhaps just a competitor sewing some seeds at a trade show.
Pro tip: Rather than a shocked surprised look when someone says, “I hear you were for sale”, practice your best chuckle and reply, “Oh yea, for the right price we are always for sale” or “Man, I am having way too much fun to get off this party bus” vs. “who told you that” or “how did you know”. Whatever your style is, prepare for a missive or two during the process and realize its likely not rooted in any market knowledge. The fact that you know you are for sale makes preparation all that much more important.
What about buyers?
As a rule, both professional buyers such as private equity groups and strategic acquirers alike understand the ramifications of a breach of confidentiality. While we make “no names teasers” fairly opaque, just introducing the company and the benefits of acquiring it, we are serious and careful about confidentiality. No one gets to know the name of your firm in an M&A process without signing an NDA.
And while no process is 100% immune to confidentiality breaches, most buyers know, and this is the benefit of using a reputable Investment bank, is they will never see another deal from us if they break confidentiality. This does not compare to the potential legal risks of breaking confidentiality. Financial buyers in particular are very careful to avoid breaches. They often do not even share the opportunity with an existing portfolio company they own, (which they might add-on your company to), until significant early vetting is done to avoid confidentiality issues or conflicts.
Should I tell my team?
Some of our preparation together will be around who on your team should know about the potential of a sale and how involved the team should be in the sale process.
M&A Axiom: Owner dependence kills deals.
One argument for including your team in the process will be to allow you the freedom and flexibility to exit sooner if your management team currently runs the business and holds key customer relationships vs. you. The anecdotal definition of a truly valuable company is one that does not need you in it! Owners who turn into investors vs. operators are often able to fully exit upon sale with no discount on the purchase price.
Another argument for including your team in the M&A process is to remember that buyers buy management teams and leaders as part of their valuation criteria. As many entrepreneurs, provided they have been growing their company are always working at the top of their game, having never operated a $30MM, then $40MM then $50MM company or 50 employees, then 100 employees, or 2 shifts, then 3 shift operation etc. Whatever your new achievement or breakthrough, having key employees capable and experienced of achieving the next growth plateau and beyond will give you additional value at sale.
Management meetings with buyers where the owners talk 90% of the time and I is used 100 times vs we, the team can be devastating to a deal. From the buyer’s perspective, and human nature being what it is, once millions are in your bank account, they see your continued involvement, skin in the game, or fire in the belly as potentially substantially less, so have a fully engaged and accountable management team is crucial to getting maximum value for your company.
These key management personnel should be placed under NDA and we strongly recommend putting Change in control agreements or “stay bonuses” in place to ensure alignment and motivation to maintain confidentiality as well as ensure a smooth transition in ownership.
A few questions we like owners to think about as they seek to empower their teams and reduce owner dependence.
- If you were “Hit by a bus” and went away how would the company perform over the short and long term?
- Have you ever unplugged for 1, 2 or 3 months and how did the company perform?
- What 2-3 leaders if you were not “in the way” would flourish as the next generation of leadership?
- Who “owns” the top 20 account relationships.
The founder dilemma is real, and we find many owners, in moments of clarity express that the company might even do better if they did not “interfere” of rely on legacy thinking to guide the future, but rather “delegate and elevate” their team to positions of true authority. This will also include emphasizing confidentiality throughout the process.
Merit Investment Bank is here to help. Reach out to discuss the best path for your company to grow and for you to build generational wealth through the recapitalization or sale of your private company. 253-370-8893 | Craig.Dickens@meritinvestmentbank.com
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