Confidentiality is an issue over which we find views crossing the spectrum of concern. Some will have little or no concern about keeping it quiet and confidential, …in fact, some will name the business in their opening Ad. Others will be paranoid about releasing information, …in fact, some will want the buyer to make an offer, before they release anything.
In our view, these are generally unwise on one hand and unrealistic on the other.
On one hand, releasing confidential information to the wrong person, or even disclosing your intentions prematurely can threaten the value of the business. On the other, if you’re looking for a serious offer from a serious buyer, and if you want an offer for a full fair market value, you’ll first have to allow the buyer to look under the hood and kick the tires.
Keep it Confidential … As you begin to think about selling the business, may we suggest that you think about it and prepare for it quietly; that you do not float trial balloons with people you think might be interested or put out feelers in and around the industry. In particular, we recommend that you do not discusss the idea with employees or with suppliers, or customers, or competitors, or with anyone else who might be in position either to benefit from, or feel threatened by your plans to sell.
Even if someone is thought to be …, or even known to be a good prospective buyer, we recommend that you do not discuss the prospects until after you’ve set your selling price and terms, and until your disclosures are fully prepared and ready for release, …until you know the deal you are prepared to close and until you are ready to explain and justify it to others.
Confidential information should never be released wistfully or indiscriminately. There is no way to get it back once its been announced, …or suggested, …or even hinted, and bad things can and often do happen when the wrong people know, or think they know, a company is for sale.
Necessary Disclosure … At the same time however, in order to gain the serious interest of a serious buyer, and in order to ascertain the level of that interest, an equally serious seller must be prepared to disclose a great deal of confidential information. An experienced buyer is not going to provide a serious or committed offer to purchase at full fair market value without first being privy to a great deal of confidential information.
Not all buyers will expect access to everything immediately, but all experienced buyers will want access to everything before they’re fully committed. At the same time, a cautious seller is going to be (and should be) reluctant to disclose all that information until certain the intent and ability of the buyer is to buy and not just to look and learn, and those concerns should elevate when the ‘looker and learner’ might be someone from within the industry; and maybe even a competitor.
Mitigate the Conflict … Thus, the conflicting interests of the buyer and seller can surface early. Improper handling of this conflict can result in the nullification of a good selling opportunity, but while it is important that no good selling opportunity be ignored, it is equally important that information not be released into wrong hands.
This conflict is best mitigated by early and thorough pre-diligence and preparation.
We recommend that your selling proposal be carefully calculated, developed and prepared in written detail, and thereafter, that information be released out of that preparation under strict terms of confidentiality and only to those who have been pre-qualified as having a sincere and capable buying interest. Many, including your competitors perhaps, will be interested in looking and learning about your business. Some may be interested in buying if it’s a steal. Fewer will be seriously interested in purchasing the company for its full and fair market value, but such is the interest that should be selectively identified before disclosures are made, and disclosures should be limited to just those few.
For many, nothing more need be said, but as mentioned earlier, confidentiality is an issue over which we find views crossing the spectrum, and you may not yet be convinced …
When contemplating the idea of selling your business or as you become engaged in the selling process, we think you should always assume the following (and more) problems can and will develop from indiscriminate and untimely disclosure of your intent to sell and the release of confidential information associated with you and your business.
- Many employees think of their relationship with their employer as a type of marriage. When you tell them you’re ‘thinking about selling’ they may hear the equivalent of you’re ‘thinking about divorcing them’ and often, even in good employer-employee relationships with years-long bond of trust can be broken.
- Your staff will generally represent a significant portion of your company’s value. Employees can become nervous and some may actually leave for what they think will be more stable employment. An experienced buyer can often sense an unsettled staff and become nervous and either withdraw or perceive reduced value.
- Even if selling is a futuristic objective, competent and stable staff will be key to building and maintaining your company’s value. Unstable, nervous employees can become unmotivated and uncommitted. Telling some employees you are even thinking about selling can play on their minds and adversely affect their focus, loyalty and work ethic. Such attitudes can cause quantity, quality and other issues that will adversely impact the ongoing profitability of the business, which in turn, will adversely impact the value of the company when selling time arrives.
- You should assume that your competitors will take advantage of any opportunity, including of any knowledge (indeed, any rumour) that the company is for sale. Assume that they will ensure that your customers hear the news as well, and assume that some of these customers are apt to lose confidence and decide to trade elsewhere. Any business decline, between now and the sale date will result not only in diminished profits, but may result also, at best, in a diminished offer from the buyer.
- Suppliers extending credit to your company may do so because of your good payment habits and dependability over the years. Some suppliers, learning that you are soon going to be gone from the business, may begin to pull back, not wanting to become exposed to new and yet unknown ownership.
- Bankers are nervous of small business at the best of times. They know you, but they don’t know the yet unnamed buyer. In fact, a banker might become concerned that your focus could begin to fade, as you pursue a selling objective. A nervous banker could have an adverse affect on your business, and again, a declining business is going to be less attractive and less valuable to a buyer.
These are but a few minefields one might encounter if and when word gets out prematurely. There are surely others, and we believe it best to bide your time with any announcement of your intent to sell.
Disclosure to all the above will become necessary eventually. Disclosure, released carefully in a timely manner that does not erode confidence will be beneficial to buyer and seller alike, and such disclosure can be accomplished safely at the appropriate time. A buyer with a name, a face and a personality, introduced in the right way, at the right time, will be much more tenable than will a totally ‘unidentified and faceless someone’ who might be buying the business. We have found it advantageous to withhold any disclosure until the actual buyer can be associated with the announcement, and introduced.
This should generally mean waiting until after an Offer to Purchase has been submitted by the buyer and accepted by the seller, and usually, until after due diligence has been conducted and accepted and the sale is about ready to close. Final diligence is often related to will key employees continue after the sale, and will customers remain loyal to the company.
Assuming the seller will generally know the answers to both, both should be addressed in the pre-diligence presentation. You won’t get a serious and committed offer to purchase from a knowledgeable and experienced buyer without the buyer being confident of these and other concerns. Most serious buyers will want to understand almost everything about the company before fully committing to the purchase.
As stated earlier, conflicting interests of buyer and seller can surface early, particularly when the planning, preparation and justification have not been adequate. But, as said earlier as well, these conflicts can be, and are routinely mitigated by pre-diligence work and preparations completed in advance of, and in anticipation of the questions. We trust you will understand how it can be accomplished, as you continue to read your way through our depictions of the selling process.