RSM Resources

You’ve decided to sell your company, and prospective buyersare calling. Perhaps they’re interested in a product patent, proprietarysystem, or some other form of physical or intellectual capital. They wantcustomer lists, pricing data and other sensitive information to develop apossible offer. But you’re looking for a prudent approach to disclosinginformation — one that helps safeguard the value of your company. What’s theproper strategy for sellers as buyers go about their due diligence?

The buyer matters
The steps you take to protect your organization’sinformation during merger or acquisition negotiations should vary depending onwho is seeking to buy your company. An inquiry from an investment bank orventure capital group, for example, probably won’t generate the same concernsas a call from a competitor or supplier. But regardless of who the prospectivebuyer may be, playing it too safe can backfire — leading to missed valuationopportunities and a lower sale price.

In virtually any merger and acquisition (M&A)transaction, the two parties will have certain competing interests. Typicallythe seller — anxious the deal won’t be consummated — doesn’t want to disclosetoo much. At the same time, the buyer wants to gather information as early aspossible, most often to place a value on the target.

There’s a common belief that competitors are the bestbuyers, says John Dorey, senior managing director for RSM Equico. “Potentialsynergies between companies, such as the ability to enhance products,distribution channels and market position, can generate a lot of interest onboth sides,” Dorey says.

But selling to a competitor can also be fraught withlandmines. “If you’re too cautious about disclosing, you can miss valuationopportunities,” says Dorey. “Conversely, you don’t want to be too eager anddivulge sensitive information that could leave you exposed if the deal doesn’tgo through.”

Even selling to a private equity buyer doesn’t guarantee thedeal has no competitive motives. While the acquiring firm may not directlycompete with your business, they may view the purchase of your company asstrategic to their holdings.

Time kills deals
Nobody wants problems that complicate M&A negotiations.And as long as a proposal is open to negotiation and scrutiny, issues can ariseto derail the process. “The longer the deal drags out, the greater the riskexposure for both sides,” Dorey says.

For the prospective buyer, a protracted deal process isundesirable because it potentially provides time for other interested partiesto enter the arena. Sellers may be wary of issues such as turnover among keyemployees, changes in the market and new innovations that could compromiseexisting technology.

Advancing the sale, protecting proprietary information
In higher-risk deals, when tensions can run high, Doreyrecommends taking a “milestone” approach to disclosing information. The termscan be laid out in the letter of intent, so both sides know when they’ll moveto the next level. “Prioritizing sensitive internal information — and sharingit incrementally as the deal progresses — can be very effective in keepingthings moving while building trust between the parties,” says Dorey.

Depending on the size of the deal, you may wish to retain aninvestment banker or broker to position and market your company. A third-partyrepresentative can evaluate your company, identify potential buyers, generate amarketing document, and outline the pitfalls of a sale in general or an offerin particular.

Discretion: The better part of value?
Particularly in the middle market, discretion can be themost critical aspect of the transaction process. To help avoid fluctuations insales, profits or the market — which can directly impact value — it’s best tokeep employees, key customers and suppliers focused on business as usual.

If you work with a third party, your representative willlikely do his or her best to keep your company’s name private. Most investmentbankers will also ensure the prospective buyer signs a confidentialityagreement.

What to tell employees
Employees who are not part of the M&A process willlikely notice hush-hush meetings, requests for data and other activities thatmay lead them to suspect something. Rather than trying to calm fearsprematurely, it’s best to defer discussions until you are confident the dealwill be completed and have a sense of how the post-sale landscape will look.

If the prospective buyer is a competitor, employees mayworry they won’t have a place in a new organizational structure. But this isn’ta given. “When there’s talk of a sale, fear usually outweighs reality,” saysDorey. “In most cases, the majority of employees at all levels are retained —the buyer regards them as assets.”

Once you feel comfortable an opportunity is viable, it’stime to bring in your management team to help close the deal. Because steadyleadership is a strong indicator of a company’s health, it’s important todemonstrate the depth and dedication of your management team to potentialbuyers.

To avoid an exodus of key people during due diligence — anoccurrence that can lower the valuation or kill the deal — executives need toknow what’s in it for them if the sale goes through. Tying financial incentivesto a successful outcome can help promote cooperation and allow the buyer to seeyour management team at its best.

Dorey cautions against providing a “golden parachute” forsenior executives — an arrangement in which the buyer must compensate employeesif they’re dismissed from duties. “If you create a liability for the buyer toassume, it could directly impact the sale price,” Dorey says. “It’s best tofocus on what you can control, rather than what the buyer might do after thesale.”

Checklist for safeguarding sensitive data
If you’re contemplating selling your business, be sure tomake detailed plans for safeguarding sensitive information during negotiationsand due diligence. To control the flow of information during M&A talks:

• Disguise deal negotiations from prying eyes by using codenames.
• Limit the number of people in the know.
• Insist on strong, signed confidentiality agreements with thebuyer and your own employees — not only your most senior leaders but everyoneinvolved in gathering and presenting information to the buyer.
• Use third parties to collect and analyze information, andconsider establishing secure data rooms and systems to share proprietary datawith less risk.
• Consider a “milestone” plan for sharing information —beginning with due diligence and culminating in permitting access to youremployees and customers — at key junctures in the sale process.