Why confidentiality is absolutely necessary when selling your company
Confidentiality is key to success at each stage of the M&A process. Here is why.
Confidentiality. This is almost always among the first words spoken between a business owner who has decided to sell their company and those to whom the decision is revealed, including the advisors in the transaction process. You are not wrong to demand confidentiality, as this is key to the success of the operation.
Why is confidentiality necessary? Should I tell my employees that I am selling?
Confidentiality is a cornerstone of any company purchase or sale transaction. Therefore, in any corporate operation, the confidentiality agreement (NDA) must start from the first moment. Even if the owner just has the idea in his head but has not firmly decided to sell, getting an NDA in place is critical to ensuring word does not get out. If you follow this recommendation now, you will save yourself a whole lot of pain and anguish down the road.
It is appropriate to inform the key people who will participate in the process that the company is for sale, by supplying them with information (usually the CFO) and asking them to keep it secret through a confidentiality agreement. With this transparency and gesture of trust, you avoid suspicions arising when asking them for information, reducing the likelihood they mention it to their colleagues. Normally, they will repay the trust you have shown them. It would be best if you did not discuss it with anyone else.
Confidentiality allows the parties involved (advisors, buyers, sellers, etc.) to share information in the transaction without any external agent discovering it. The mechanism that guarantees confidentiality in this type of operation is known as a Non-Disclosure Agreement (NDA). This agreement binds potential buyers who have been qualified to carry out the transaction (i.e. those having a strategic fit and sufficient resources. At these early stages, they have been provided with a blind profile and have shown interest in moving forward with the potential purchase.
“At ONEtoONE Corporate Finance, when we deal with potential buyers, we only do so with large international groups with professional teams specialized in corporate transactions that are very clear on the importance of confidentiality.”
Compliance with the NDA implies the non-disclosure of the information received (transmitted and perceived by observation). You should bear in mind that maintaining confidentiality is an essential tool, especially nowadays, due to the role played by new technologies making information much more accessible and immediate. The signing of an NDA obliges the parties to monitor compliance with a series of obligations concerning the information transmitted, not only at present but also in the future. Non-compliance by any one of the parties can negatively affect the operation’s development and closure.
But what happens if the information is leaked?
Transaction price variation: How many times have we seen how a rumor in the market can change the share price? Rumors can sweep away the initial defined strategy, impact the valuation and sometimes even force the parties to abandon the deal.
The exit of key professionals from the organization: The management team and key people in an organizational structure may feel threatened by the proposed transaction long before the new partners arrive and explain their new intentions. Losing these professionals can be disastrous for the operation, as the buyer may back out or lower the price due to the loss of value implied by the loss of key people for the company.
“It would be best if you put in place means to prevent managers from leaving during the negotiation phases.”
One measure we have applied on occasion with the business owner has been to inform critical managers of the idea of a sale in two years and reward them with a percentage of the transaction’s value. This encourages them to work together to improve financial ratios (and company valuation) during this period. Other times, we define a price that we consider reasonable with the employer and indicate to the managers that they will receive a percentage of the increase on that price. Therefore, they see a clear benefit in making a significant effort for the company, since they become business owners (to a certain extent) and they won’t leave by surprise before the deal is finalized.
Confusion in the workforce: From the beginning, rumors of a new shareholder can generate nervousness among employees, directly affecting their work performance and, by extension, the company’s financial results
Concerns of customers and suppliers: News of a new shareholder situation may cause uncertainty for customers, as they do not know whether they will be able to count on the company’s products and services under the same conditions. Suppliers may not know whether they will be able to rely on the approval of the new owners
Without M&A advisors, it is tough to maintain confidentiality and to carry out a rigorous search process for the best buyer. If you do not give exclusivity as advisors to a firm specializing in companies’ sales, do not expect confidentiality either. You can not expect two advisors to compete to find a buyer and at the same time do it confidentially.
ONEtoONE Corporate Finance is a global investment banking group with 200+ M&A Advisory specialists in over 30 countries and 50+ cities worldwide. They have advised on over 2000 successful M&A transactions, with >70% being cross-border deals.
Contact:
Stephen McNamara has over 15 years experience in Corporate Strategy, M&A, and Investing. He is currently a Senior M&A Advisor with ONEtoONE Corporate Finance. If you are interested in buying or selling a business or investing, please feel free to email: stephen.mcnamara@onetoonecf.com. All correspondence will be handled with utmost confidentiality.