EXIT STRATEGIES: Confidentiality

If you are talking to potential buyers about selling your business, this can lead to some unfortunate results if handled incorrectly. Competitors can use this information against you, key employees might decide to leave, staff can be stressed due to uncertainty and become less productive, suppliers might want early payment and so on. How can this be handled with both external and internal parties?

External parties

Probably there is no one right answer and it may well depend on your own position within an industry. The norms in each industry vary. It may also depend on how good your existing relationships are with customers, suppliers and partners.

Open intention

Some industries, such as the software applications and systems market, accept that everyone is for sale. Since they are for sale, discussions are always taking place between parties as to mergers and acquisitions.

Generally, acquisitions take place because a larger party can better scale the operations and therefore customers are reasonably well protected.

Strategic investor

Many firms are looking for investment to help them develop their business. These can often turn into acquisitions. Providing the firm is open about looking for a partner, it may not be a surprise if that turns into a sale.

Longer term objectives

Many owners are quite open about wanting to retire at some time, or being open to an offer if the offer is a good one. Providing this is not a secret, the firm is reasonably well protected from rumours.

Private negotiation

Some customer deals may be quite sensitive to a possible takeover. However, provided this is dealt with confidentially and the reasons are beneficial to the prospective customer, it may be better to declare this privately to the prospect. If they then hear it from another source, at least it was not kept from them.

Partnership deal

A discussion of a possible acquisition can be portrayed as a partnership or alliance arrangement. A larger corporation which is looking to distribute your products or enter into a joint venture may wish to carry out extensive due diligence to protect themselves. Another way in which this can be explained is through a licensing arrangement. Again, much of the discussions are similar to those undertaken in an acquisition process but this public declaration allows the firm to proceed without declaring they are going through an acquisition discussion.

If you don’t have to do a deal, you can always simply entertain the possibility and portray in that light. That is, “if the right deal comes along – of course we would be foolish not to investigate it”. This is something which any reasonable business owner would say and should not convey the impression of a firm in trouble or desperate to do a deal.

If on the other hand, you are desperate to do a deal, the best way to do it is quickly. The longer the market sees you in trouble, the greater the impact on your business. Competitors will be quick to seize the opportunity of undermining your sales efforts.

The only way to execute a deal quickly and yet still come out with a premium price, is to be proactive and prepare for a sale. Providing you know who the potential buyers are and have established the type of relationship which you can leverage to get a deal done quickly, you should prevent any major negative effects on the business.

Consider using a Non Disclosure Agreement to ensure the other party understands the seriousness of the information you are sharing with them.

Internal parties

Employees are naturally going to be concerned about any possible major change in ownership. They will have heard stories of other firms going through the process and know of redundancies, relocation, changes in work practices, remuneration, benefits and so on. No doubt some of that will happen when your firm is sold. So how can you best deal with that?

Make it strategic for employees

When you seek a company which can exploit your potential, scale your operations, overcome your limitations and provide a larger market for your products and services, employees are often better off. You should be conveying the message that you would always be interested in a sale where the employees may have better career prospects.

Involve managers and key employees

Some staff are required to make the transaction possible. They will be providing data to the potential buyer as part of the due diligence. They need to be informed about what is going on and be counselled about the implications for their jobs. Where there are potential negative impacts on them, these need to be discussed and a plan put together for mitigating the effect on them personally. This could be a lump sum payout, redundancy payment, a longer notice period and so on.

Provide incentives

If employees have an incentive to make the transition work, they will tend to support it more. The incentives could be in the form of shares, options, bonuses and so on. There needs to be an alignment of the interests of the shareholders, managers, employees and the new owners.

Employment agreements

As part of a review of general employment conditions, consider incorporating a bonus at the time of the sale of the business, special termination conditions if the business is sold and/or special retention bonuses for key employees. This change can be incorporated into standard employment conditions along with other updates on health benefits, maternity leave and so on, perhaps based on an external professional review.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.