How to Protect Company Secrets During Merger Talks
The secret is protected beneath layers of security in a non-descript bank vault deep in the suburbs of Atlanta. Legend has it that only two living people know the formula, which is so precious neither person is allowed to travel on the same plane for fear a crash would destroy the secret forever. Coca-Cola will go to any length to protect its recipe.
Likewise, finding out just how Colonel Harland Sanders mixed those eleven herbs and spices to make his world-famous coating for deep-fried chicken would require discovering the undisclosed location of a bank vault somewhere in Louisville, Kentucky.
Most businesses have confidential information, processes and formulas they would not want their competitors to see. When you decide to put your company up for sale, you risk giving strangers—potentially even your competitors—the keys to your vault.
In my experience, there are three basic stages at which you'll need to reveal an increasingly deeper level of information when selling your business:
Level 1: Teaser document
Once you decide to put your company up for sale, your adviser will work with you to create a short description of your business, which disguises your company's identity but provides enough information to pique a potential acquirer's interest. Your 'teaser' will typically include:
- A basic description of your business (what you sell, to whom, etc.);
- A profile of your customers (how many, how often they buy);
- Your basic financials (revenue, EBITDA, historical and projected growth rates);
- An overview of the market opportunity (size of the market, opportunity for growth).
Based on the limited information you reveal in a disguised teaser, your risk of giving away something you'll regret is limited.
Level 2: The book or online data room
Of all the companies and individuals who receive the teaser document, some will, you hope, request a more detailed description of your business. Your adviser will likely ask the acquirer to sign a non-disclosure agreement in return for access to more detailed information, which is presented in either 'the book' or an online data room.
This is when things get tricky.
In addition to revealing the name of your company, you'll want to provide the potential buyer with enough information about your operations to get him or her excited about making an offer. This information often includes details on your future plans, sales processes and even your new product development ideas.
Oftentimes you'll get your best offer from someone close to your business—either a competitor, supplier or another company that is adjacent to your business.
Outsiders will now start to understand your special approach and what makes your business unique. They are not under any obligation to make an offer, yet they have access to competitive information. Some companies even make a habit of claiming interest in buying other companies in their industry just so they can get a look at their competitors' confidential plans.
There are some things you can do at this stage to minimize your exposure:
Don't give away the secret recipe
The book (or online data room) needs to include historical financials, future projected financial performance, details on your customers, contracts, leases, etc.
It does not have to provide your deepest secrets for making your product or winning customers. If there is something truly proprietary in the way you make what you sell, leave it out of the book or online data room.
Request that an online data room be created
Instead of providing a printed book or a PowerPoint file/PDF file that can be easily forwarded, request that an online data room be set up. An online data room is simply a password-protected website to which the potential acquirer needs to log on to view files.
An online data room provides a greater level of security, visibility and negotiating leverage for you because you can see who has accessed what files and how deep some buyers have gone to understand your business. This provides you clues about who is really serious about making an offer and can help you spot individuals who may just be on an information-gathering expedition.
Level 3: Diligence
Once potential acquirers have reviewed the detailed information in the book or online data room, you will possibly get some offers. Most likely, each offer will be contingent on your agreeing to stop negotiating with other parties and to provide the bidder with a two- or three-month period for due diligence.
In the diligence phase, the buyer's representatives will likely come to your business and demand an even greater level of detail. They may want to talk to some customers and see your contracts with them, and they will want to inspect your physical plant or office and watch how things get done. They'll want to talk to your salespeople and understand your formula for winning new business. You'll need to provide full disclosure at this point, which opens you up to the greatest risk if the deal does not go through.
The best way to protect yourself is to perform your own due diligence on the buyer before you agree to his or her offer and the accompanying scrutiny of due diligence. Here's what to check out:
- Does the buyer have a history of making acquisitions? If the company has made three acquisitions in the past year, you can safely assume it is actively pursuing acquisitions as part of a growth strategy and is a serious buyer. If it has not made an acquisition in the past few years, that should trigger a red flag.
- Does the company have a history of walking away from deals? Ask your M&A adviser about its reputation as an acquirer. The best M&A folks will be well connected and can tap their network for an off-the-record assessment of the reputation of the buyer. If a company has made offers that it later walked away from after diligence, don't be surprised if it walks away without closing your deal.
- Does the company have a history of making last-minute changes to its offer? Some buyers have a strategy of introducing new deal terms or a lower price a few days before a deal is scheduled to close. They know the seller has invested a lot of money and emotional energy into the sale process and may be reluctant to walk away, making it easier to get concessions the seller would not have agreed to earlier in the process. Try to speak with other owners who have sold to the company making the offer. Ask directly if the deal was changed during the diligence period and what last-minute surprises they were faced with.
Selling a business requires you to expose yourself in a way that will not feel natural. Protect yourself by revealing what's appropriate given the stage you're at.
John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies. Most recently John transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which was acquired by The Corporate Executive Board. In 2008 he was recognized by BtoB Magazine's 'Who's Who' list as one of America's most influential business-to-business marketers.
JOHN WARRILLOW | Columnist | Sellability
John Warrillow is the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a cloud-based software company that helps business owners improve the value of their company.