During World War II, a popular slogan warned that “Loose lips sink ships!” It was a reminder not to freely discuss the route of a ship for fear that an enemy agent might overhear the conversation, pass the information along, and endanger the ship and its crew and cargo.
These were words to the wise then. And they are today, especially when it comes to an M&A transaction involving your business.
As an investment banker, I’ve been selling mid-sized companies for 30 years now, and I can tell you unequivocally that business owners selling a company want two things – absolute confidentiality and the best price. I can also tell you that the first is essential to the second.
Here’s what a breach of confidentiality could mean:
1. You could lose control
As a business owner, you need to control the information that is released about you and your company. Experienced investment bankers will explain how your information will be protected and how it will be carefully distributed.
Likewise, you will need to control the flow of information within the company and keep your investment bankers apprised.
After the sale is completed, you and the new owner should decide what information will be released to the media. There are definite benefits to announcing the sale and promoting the new organization, but the timing is critical.
2. You could lose customers
When you’re trying to sell your company, you want to remain focused on growing the business and exceeding customer expectations. If customers discover you are selling, they may be less willing to continue doing business with you. And your competitors will use any information about a possible sale to lure customers away from you.
Similarly, potential new customers who learn about the pending sale may decide to buy from competitors, especially if your business requires long-term contracts. No one wants to be trapped in a contract with new owners they don’t know.
These are some of the things that customers fear, even though the reality is that the sale of a business generally has little, if any, impact on customers. The new, larger company may even provide services or products you can’t provide. In addition, it is likely that you won’t be leaving the business overnight because both you and the new owners will want to ensure a smooth transition. By maintaining confidentiality, you can avoid all of these concerns and preserve the opportunity to tell your customers at the right time.
3. You could lose high-value employees
You have built a successful company by building a strong team. Your managers and employees know the business, your customers, your plans, your strengths, and weaknesses. They are vital to maintaining the value of your company and are critical to a successful sale.
If key employees find out about the pending sale too soon, they may worry about losing their jobs and look for other employment. Losing key managers and employees is bad for the pending sale and can actually lower the value of your company.
When planning to sell, some owners choose to inform key employees only. Generally this is a wise decision, because these employees will be extremely important during the due diligence process, and they will help to ensure smooth operations during and after the sale.
However, every employee that is informed about the pending sale is a confidentiality risk. Work with your investment bank to obtain signed confidentiality agreements with key employees and to assure them their jobs are not at risk.
4. You could lose company value
A serious breach of confidentiality, such as leaking what the owner “thinks” the company is worth can have a dire impact on the transaction and even lower your company’s valuation.
Everyone involved in the selling process – the owner, investment bankers, lawyers, accounting firms, key employees and others – must maintain strict confidentiality to ensure the process is effective, ethical and fair to all parties.
Confidentiality begins with a strong commitment and is sustained by careful attention to detail. Owners must make sure that conversations are private and that no documents are left on the copier or any other place where employees might find them. You and the professionals you hire to sell your company are entrusted with information that can have a serious impact on the company and everyone associated with it. Yes, loose lips can sink ships…and the sale of a business too.
At Allegiance Capital, we want you to know what you’re getting into when you sell your business. We view educating prospective clients as one of the most important things we do.
We like to begin our process by offering a free book called Street-Smart Moves for Selling Your Business by Joe Aberger. It’s brief, well-written, and addresses 29 topics that are critical to selling a business like yours. Be sure to Sign Up Now.
And, in the meantime, if you have questions, feel free to call me at 214.217.7732.
About the Author
David J. Mahmood
Founder & Chairman
Phone: (214) 217-7732