Selling a Business: Confidentiality and Balance
Selling a business is complicated – fraught with pitfalls and slippery slopes. To say nothing of slippery operators!
From organizing the financials and developing the marketing plan and collateral pieces to vetting potential buyers and negotiating the terms and conditions of the transaction, the task requires multiple skills, patience and focus. It also requires time – and lots of it.
Few business owners possess these skills and even fewer have the time. That is, of course, why specialists such as professional business brokers and M&A advisors exist.
This is a subject I’ve flogged repeatedly and vociferously over the years – and probably to the relief of long-time readers, I don’t plan to bring it up beyond that comment in this post.
But there are counter-acting forces at play during the process of selling a business.
Both are critical to a successful sale but each is in conflict with the other. Handling them properly requires the owner not only to be aware of them but, more importantly, to always be cognizant of their shifting relationship to one another. The need for one has to be balanced by the need for the other.
What are these conflicting forces?
Confidentiality and the need to know. And the balance between the two important aspects of the deal changes over the course of the selling process.
When selling a business, confidentiality is critical on a number of levels. If word that a business is looking for a new owner hits the street too early, there is the risk of losing employees and clients. Competitors might see a way to gain some advantage by spreading a rumor that the company looking for a buyer is suffering and may be in trouble.
Financial information is likely to leak out.
All of this is to the detriment of the business and is likely to hurt sales, possibly damage the business’ reputation and make it harder to find a buyer – to say nothing of reducing the likelihood of getting the best price.
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Even after a letter of intent is signed – or even after an acquisition agreement is in place and the due diligence period has started – confidentiality is still critical; perhaps even more so.
But this is also an inflection point. Balance begins to shift – barely perceptively when the LOI is signed and gradually more rapidly as the process unfolds.
But one element of the need for confidentiality during the selling process that is rarely considered until it’s too late is this:
What happens if the deal falls through? If confidentiality has not been maintained, the proverbial cat is now out of the bag, the buyer has moved on to other opportunities and the seller is standing alone knowing that much of his or her world is now aware that the business is for sale.
To Quote the Moody Blues, “It’s a Question of Balance”
But there are certain stages in the process where balance begins to be the more important consideration.
At some point, certain people have to be told what’s going on – but THEY need to understand the need for confidentiality, also. These people are the employees.
But not all employees are created equal in this circumstance.
If the business has an in-house accountant or bookkeeper in whom the seller has great trust, that person will need to know that the owner is considering selling sooner that almost everybody else simply because the financial and legal documents that will need to be produced during the early due diligence period will raise suspicions that, left unaddressed, will surely lead to rumors within the company and then over dinner when employees are at home expressing a vague concern about the future to their spouse.
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But at the same time, care must be given as to when ALL – or a majority – of the employees must be told.
Consider this true story.
The owners of a printing business were ready to sell.
The business had grown substantially over the most recent seven-year period and was now generating almost $20 million in revenue. It had gotten to a point that it needed more expansion capital and management with experience running what was expected to become a $50 million business in the next few years. The founders knew that, of the business was to grow to its full potential, they needed to step aside.
They maintained the highest level of confidentiality for months. They found a private equity group that had the experience necessary to manage and grow the business and a deal was negotiated.
The day before the deal was to close, the owners decided to introduce their management team and key employees to the new owners.
The owners arranged a lunch at a nice quiet restaurant for the team. They were tucked away in a comfortable dining lounge, everyone enjoying a little time away from the busy office. These were the people that supported the owners as the company grew. They were sitting in the room about to meet their new bosses, right after the owners tell them the business has been sold.
Without notice, two strangers walked in. To say that the key employees were blind-sided was an understatement. According to the owners, a feeling of betrayal rippled through the room, touching every one of these treasured employees
Buyers are not immune from some responsibility in this drama either.
Smart buyers want to make sure that the management team responsible for the company’s growth has enough time to process the fact that the company is being sold and that everybody has a chance to get comfortable with the new owners. Because without those employees, the business will likely suffer in the aftermath of the sale.
And, as might be expected, over the next year, the talented employees of this business gradually found other opportunities. The company experienced the bumpy road of recruiting and training – and the unsettled nature of a business trying to navigate a transition without its critical people.
One of the sellers later talked with one of the employees that was in that restaurant for that meeting and was told that, “If you would have announced to just our intimate group, they would have been able to express their shock, their grief and ask questions about how this applies to me.”
And this may sound like an issue only for the buyers to be concerned with. But if you’ve been following this blog for any period of time, you know that upwards of 80% of small and lower Middle Market transactions involve some level of seller financing.
If the seller is counting on the business’s continued performance over the next several years to cover the note payments, a reversal of the growing revenue trend could jeopardize the business’s ability to make those periodic payments.
Unfortunately, it is not uncommon that sellers who have taken back a note have to come back in to rescue the business.
The Bottom Line
Confidentiality is crucial when selling a business. But balance is equally important.
Professional business brokers can advise when to start telling people and who should be told.
Getting this wrong could make what should be no worse than a bitter-sweet event, a calamity.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.