When a business owner decides it is time to sell his business, one of the many decisions he will have to make is whether he is willing to sell to a competitor. There are other types of buyers to consider, including financial buyers (private equity firms, high net worth individuals), family members, and employees. However, because of the synergies that can be achieved, competitors are often willing to pay the highest price for a business. So if your primary goal when selling your business is to maximize value, competitors should definitely be included in the list of potential buyers.
Although the process of selling to a competitor is similar in many ways to selling to any other type of buyer, the seller and his advisors should be cautious when sharing proprietary data with competitors. The proprietary data needs to be released in a modulated manner at the appropriate time and in suitable form. Following are areas where a careful and gradual release of information is important:
The initial solicitation of buyers should include a blinded executive summary.
One of the first outward facing activities in the process of selling a business is putting together an executive summary (often called a “teaser” by industry professionals) and sending it to all agreed upon prospective buyers. When including competitors in the buyers list the executive summary should be blinded, which means it will not include the company name or any other information that would allow recipients to identify the business for sale.
Have all interested prospective buyers sign an NDA.
It is standard practice for professionals in the industry to have interested prospective buyers sign a non-disclosure agreement (NDA) that prohibits the company from using the information for any purpose other than the evaluation of the acquisition. NDAs typically include clauses forbidding the signing party from sharing the information or soliciting employees of the seller for hire for a period of twelve to twenty-four months after the signing of the agreement. After this agreement is signed the investment banker (i.e., M&A Advisor) will release the name and location of the company and typically send the full confidential offering memorandum.
Limit the inclusion of sensitive information in the confidential offering memorandum.
The goal of the offering memorandum is to expand on the limited information contained in the executive summary. It should provide the prospective buyer with enough information to begin their evaluation of the company and decide if there is a true strategic fit with their company. The investment banker preparing the document should work with management to anticipate and answer most questions a buyer will have. However, there is a significant amount of information that should be left out of the offering memorandum and reserved for the due diligence stage of the process. For example, a detailed customer list should not be included in an offering memorandum. Instead, and what an informed buyer should really be evaluating anyway, the offering memorandum can include information about customer concentration and key distribution channels. This data will give them enough information to perform their critical analysis but not enough information to interfere with the seller’s customers if they are not the successful buyer.
Vet the interested potential buyer before sharing additional information
As sellers and their investment bankers start interacting with prospective buyers it is very reasonable for the sellers to request financial information, business plans, and other pertinent information from the prospective buyers. This information will allow sellers to determine if the buyer has the financial strength to complete the transaction and has thought through the transaction in enough detail to describe their post-acquisition plans and expected synergies. If they are not willing to share some of their information that should raise a red flag about their real intentions and cause the seller to become even more cautious about sharing their sensitive information.
Reserve truly sensitive information until after a single buyer has been selected and Letter of Intent (LOI) to purchase the company has been signed.
Truly sensitive information such as detailed customer lists, pricing, customer and supplier contracts, and detailed new product and R&D efforts should not be disclosed untila LOI has been signed with a single buyer and the company has entered into due diligence. Even then, if the size of the transaction is $78.2 million or higher (as of 2/25/2016 and adjusted periodically) and thus the transaction is subject to a Hart-Scott-Rodino antitrust filing and review, the seller should consult experienced legal counsel before revealing certain sensitive information. If there is certain information the seller believes is too sensitive to share with the prospective buyer prior to the closing of the transaction, but the buyer insists on reviewing, the parties may be able to compromise by having a qualified third-party consultant review and opine on the detailed information without sharing the details directly with the buyer. A cautious but flexible approach to sharing the data will be important for completing the sale.
Business owners should not make the mistake of excluding competitors from the buyers list when selling their business because selling to a competitor is often the best choice. Despite the competitive risks involved, if the sale process is managed in a competent and collaborative manner by the investment banker and business owner, sensitive information can be shared gradually and in the appropriate format such that the prospective buyer can complete the necessary due diligence and close on the acquisition while minimizing the competitive risks to the seller. The professionals at Waypoint Private Capital have significant experience managing the sell-side transaction process and helping business owners navigate the challenges of selling to a competitor.
For more information about selling your business, please see Waypoint’s M&A Services or contact Steve Sprindis.