When selling a house, the owner’s agent puts a sign in the front yard, posts info on the Web, and invites buyers over for an open house. When selling a car, we put a sign on the windshield and take out an ad with our phone number on it. However, when selling a business, some owners do not even tell their spouses.
The potential costs of rumors and information leaks are much greater when selling a business, but the buyers-to-deal-terms-ratio remains the same: the more buyers who are contacted, the more likely the owner is to get better pricing, terms, and a closed deal.
During the sale process, the owner can control the flow and access of information. One way to do this is to leave more sensitive information for later in the process. Working with advisors (broker/investment banker, attorney) is a good way to decide when and how to disclose information. Every situation is different, so the seller’s team will need to craft a customized solution. No one knows your business as well as you, but your advisors have been through these situations many times, whereas most owners only sell a business once.
Typically, a blind executive summary is used to first contact buyers. This is usually detailed enough to gain buyers’ interest, but not enough so that buyers/tire-kickers can guess the name. For example, use "Northwest Manufacturer of Military Electronics" instead of "West-Side Walla Walla Manufacturer of Left-Handed Scissors."
Before sending out more confidential information as well as disclosing the name of the company, buyers are asked to sign a non-disclosure agreement (NDA). It is important to have a good NDA that is tailored toward an M&A deal and have it reviewed by an attorney. The NDA should be good enough to protect the seller, but not so strong as to turn off buyers.
After a buyer receives the confidential memo, they often wish to visit the facility and meet management. To help eliminate tire-kickers as well as to prevent a parade of buyers through the facility, buyers can be asked to submit a preliminary indication of interest (IOI), which states their intended valuation, terms, ability to finance a deal, and other conditions. A limited number of top buyers can then be invited to visit.
On-site meetings could obviously set off the rumor mill. Holding off-site meetings with buyers are a possibility, especially in the early stages of the process. Many sellers prepare a video (which can also be used as a sales/marketing promotional video with a little editing). A good video can usually reduce the need for an initial visit, although eventually the buyer is going to need to see the facility. If enough information is given to the buyer, they may feel comfortable signing a letter of intent prior to visiting the facility or meeting with non-owner management.
Another way to control the flow of information is to limit the number of buyers who are contacted. We often find that the best buyers are found by going out to many targets. Many times, the best buyer is a "wannabee" who comes from outside the industry. The advantages of casting a wide net of buyers must be weighed against the risks of the word getting out.
What and how to tell employees (and which employees) depends on the prior relationship and the situation. If you have always been open with your top employees, it makes it difficult to hide the sale of the company. To keep top employees on board, consider paying stay bonuses, perhaps with one amount at closing and one payable three, six, or 12 months afterwards. Buyers will want to meet senior executives, who can be valuable in helping to sell the business, so the timing and message of when to include management is very important.
Before starting the sale process, think about what to say if approached by an employee, supplier or customer about a rumor. Responses I’ve heard range from “none of your business” to “any business is for sale at the right price,” and “you’ll be the first to know if we have a deal in place.” As part of due diligence, buyers may wish to talk with key customers and suppliers. This process should be pushed to the latest stage possible.
Eventually, the owner will need to disclose to all parties that the company has been sold. The message should be honest and direct, and coordinated with the buyer. Revealing the deal too soon, or with the wrong message, can jeopardize the deal and damage the value of the company, so the timing and content of the disclosure must be considered carefully.
Eliminating all rumors and leaks is impossible. I’ve been involved in deals where an owner mistakenly gave an employee a purchase agreement to file, and another when a heretofore professional buyer showed up unannounced at the seller’s facility and told the receptionist, "I’m here to buy the place." Rumors are a part of life, and as the PCB and EMS industries consolidate there will be more and more rumors. Proper planning and consultation with experienced M&A advisors will help the owner manage the process.
Tom Kastner is president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries.