Why M&A Deals Depend on Confidentiality

Selling the shares you hold in a company vs. selling the assets out from the under the company can make a big difference in taxes, who assumes certain liabilities and what happens to certain contracts. There are challenges with each, such as the assignment of customer agreements with an asset sale, and change of control clauses in stock sales. We’ve known Ney Grant, an M&A Advisor on the west coast, for many years and he has recently released what looks to be a quality eLearning program (a series of 25 videos and materials) on how to sell your middle market business. He has shared his video with us on Stock vs. Assets sales which describes, in very visual terms with a stack of cash and toy tractors, what really happens in a stock sale vs. an asset sale and why buyers typically prefer asset sales.

A successful M&A deal depends on confidentiality. The primary goal of a good M&A Advisor or business brokerage is to structure a competitive bidding process with a well-designed deal, while protecting confidentiality for as long as is necessary. Confidentiality protects the seller’s interests. It also encourages creative bidding. So don’t let it fall by the wayside, or work with a banker who doesn’t have a clear plan in place for protecting confidentiality.

The Non-Disclosure Agreement
Your NDA is your first barricade against confidentiality breaches. But it’s also only as reliable as the people who sign it. Part of your advisor’s role is to ensure that the other party follows the terms of the agreement.

In most standard M&A transactions, acquirers receive an anonymized profile of the company, allowing them to preliminarily determine how interested they are. If both parties are interested, they’ll sign the NDA. This agreement establishes a legal confidentiality framework. While it gives a mechanism of action if either party violates it, by then the damage is already done. So trusting your deal partner is every bit as important as a well-crafted NDA.

The Risk of Internal Disruption
Internal disruption is the biggest threat to any deal process. Internal issues can prevent a company from reaching its goals as laid out to acquirers. The executive tea must not be distracted by the M&A process and neglect daily management. To achieve this goal, businesses must have a small and trusted group of team members who can oversee the deal. Confidentiality within this team can prevent the deal from undermining daily operations while allowing your staff to stay focused on daily tasks and customer satisfaction.

It’s important to consider that not everyone on your team will be exited about a potential sale. Your staff may disengage from their work if they feel threatened or uncertain. This can directly affect your company’s performance, and may harm the deal. Moreover, a promised deal may fail. So there’s no need to trigger staff anxiety before you have an agreement in place.

Customers
Your customers are your customers because they like what you offer. If they suspect that might change, or if they disapprove of the deal, they may jump ship before getting the chance to see what the deal offers them. Customers will worry about renegotiating contracts, about how service will be affected, about whether their personal relationship with your business will change, and much more. Protecting confidentiality until you can be upfront with your customers about what the deal offers them is in everyone’s best interests.

The Competition
Competitors are among the natural list of acquirers. Give them too much information too early, and they can use it to gain an unfair advantage in negotiations. Or they can even use proprietary information to their own benefit and back out of the deal.

Competitors who are uninterested in acquiring your business may want to use the deal to their advantage—to access your customers or sow chaos in the market. In either scenario, protecting confidentiality protects you from the havoc your competitors can wreak if they catch wind of a deal too early.