The sale of a business creates a unique marketing dilemma. On one level it is in the best interest of the seller to create a robust marketplace for the sale of a company with the maximum number of potential buyers exposed to the acquisition opportunity. On another level, it is in the best interest of the seller (and the company being sold) for no one to know a sale of a business is being contemplated.
The reasons for the creation of a dynamic marketplace for the sale of a business are straight forward. The more buyers that are exposed to a business opportunity the greater the probability of locating a potential buyer that will complete the acquisition at a price & terms that will be satisfactory to the seller. In addition, the greater the number of potential buyers the higher the likelihood the creation of a competitive marketplace for the sale. Competitive marketplaces traditionally result in higher prices being paid for products.
The reasons to limit information about a business being for sale in the public domain relate to effective management and operation of the company pre & post transaction. It is in the best interest of both the seller and buyer involved in a transaction related to the purchase & sale of a privately held company to keep information about the contemplated transaction confidential. Business performance and relationships with parties engaged with the company can be detrimentally impacted if information about the sale reaches the public domain in an uncontrolled manner. The following are some of the areas that can be impacted by confidentiality being broken.
Executive Management – Management of a privately held company is problematic during a business sale because decisions made in the present by ownership can impact positively or negatively the business in the future. Customer contracts negotiated today need to be delivered profitably in the future. Marketing & advertising strategies incur expense before their effectiveness can be evaluated. Facility decisions can result in a shortage or excess space, fixed operating costs, and legal liability in the future. Decisions made in a state of limbo can be difficult to make for transitioning ownership. They are even more difficult to make or execute, if they are subjective judgment calls in grey areas with legacy impacts. The difficulty in making a decision can be greatly enhanced if the party on the other side of the decision is reluctant to make a commitment to the company because they know a transition of ownership will occur in the future. This is a reason why at IBA, the oldest business brokerage firm in the Pacific Northwest, we place an emphasis on timely facilitation of business sales for our clients (Traditionally, 3 to 9 months from representation agreement execution to transaction completion). Frequently worse for a company than retiring ownership making the wrong decision based on years of experience & knowledge, is not making a decision. Business is the ultimate competitive sport. Sitting on the bench as the President & CEO of a company can have a negative impact on future company financial performance and/or the loss of market share. A decline in either can have a negative impact on company value, another reason to get in and out of the marketplace efficiently as a business seller.
Employees – One of the intangible assets of a business is the knowledge, experience, and talent of the staff. A smooth transition of ownership is often contingent on staff retention. If a contemplated business sale becomes known to employees, some employees may proactively seek positions with other companies out of fear of the unknown regarding future ownership. If competitors learn a business is for sale, they may seek to hire key employees away from the business. It is common for key employees to be known by competitors and for them to have made prior overtures to them about switching companies in an industry. Employee retention is frequently as much about corporate culture and loyalty to ownership, as compensation. There is no reason to lose these retention tools prematurely, as the old saying goes, “Lose lips sink ships”. It is recommended that a business sale only be disclosed to employees once a buyer has been identified and a completed transaction is a probability. It is important that the disclosure of the sale to employees be managed & articulated collaboratively by the seller & buyer to put the transaction and future executive management in the best possible light. Experienced M&A intermediaries can provide guidance on “best practices” for maximizing employee retention after a transfer of ownership.
Customers – Customers desire to do business with companies with stability. As a consumer, would you select to purchase a product from a company with uncertainty that you would be able to return it, a warranty would be honored, and/or that you would not be able to reorder it in the future, if it was reoccurring need. A business buyer assumes that there will be continuity of business by the acquired company in terms of revenues & operations in the future. The best way to insure business continues as usual post sale is to mitigate customer knowledge about the business being for sale. It has been my experience as a twenty-five year mergers & acquisitions intermediary, that provided product quality and customer service remain the same post sale, that customer retention is generally not a problem.
Vendors – Vendors often have exclusive or semi-exclusive relationships with companies. Continuation of these relationships post sale is a component of the value of a business. Best practice for a business sale is to manage the transition of these relationships from a position of control where the business buyer can be professionally presented to the vendor deep into the sale process to create an urgency to facilitate the transfer of the relationship and limit the opportunity for the vendor to explore alternative options.
The sale of a business is a sophisticated, nuanced process requiring knowledge, experience, and a high professional skill set. A business brokerage firm should have systems & strategies in place to insure that confidentiality is not broken in the public domain until it is desired by the parties and then only in a managed process where information is distributed in tiers on a “need to know” basis. It is not uncommon in IBA facilitated transactions, as one of the premier M&A firms serving the main street & middle markets in the Pacific Northwest, for our business sales to remain unknown publicly for months after the sale by a company’s customers, if business continues as usual with the same staff, level of customer service, and product quality after the transition of ownership has been completed.
If you are an entrepreneur interested in selling your privately held company or family business who would like to learn more about how to complete a transaction in an environment of confidentiality, the professional team at IBA would welcome the opportunity to answer your questions about this element or the entire process associated with the sale of a business.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.