This second in this series of two articles, identifies some common areas of conflict and tries to convey how the buyer will view the situation, allowing sellers a better understanding of what is after-all an extended game of high-stake poker. It will hopefully better prepare you for what behaviour is expected from you as a seller and drive a more positive relationship with prospective buyers.
There are good reasons why confidentiality is a key issue to both buyer and seller. Disclosure of the target’s impending sale can cause understandable anxiety to employees, customers and suppliers who fear the sale would ultimately lead to an unfavourable change of their current conditions. While it is largely the case that being acquired by a larger group leads to more favourable terms, it is perhaps human nature to fear the worst and no amount of persuasion to the contrary can cure this anxiety. A buyer similarly has reason to keep their intentions confidential, since it may similarly cause issues with its own employees, as well as in some cases issues with competition regulators, shareholder interest (if public) or even unwelcome intrusion by a competitor.
Buyers generally take care not to breach their Non-Disclosure-Agreements (“NDA”), since it would irreparably damage their reputation in future M&A processes if it were disclosed that they failed to observe their obligations under such agreements. The M&A executive will take care to give your business a “cryptic” project name and will both limit the people that are involved, making team-members and advisors sign their own confidentiality agreement to underline the sensitivity of any breach of their NDA obligations. Given the care taken by the buyers, it is perhaps not surprising that their frustrations will peak, when the seller, with usually the best of intentions unilaterally seeks to breach the confidentially provisions.
These intensions are usually based on an overriding feeling of obligation to tell his staff the truth of what is happening or a belief that the disclosure will lead to a beneficial resolution of a commercial issue. Despite such good intentions and well-founded beliefs, such disclosure rarely resolves problems and more often creates new ones.
On a past transaction, the seller was worried he would lose what he viewed as a critical member of staff, and so disclosed both the deal being prepared and provided a written offer significantly increasing the salary in a bid to secure them. While the intention of the seller was well meaning, the staff member still left the business, but not before sharing the letter to the rest of the staff. Instead of focusing on completing the transaction, the seller was forced to deal with the growing anxiety and resentment of his workforce who not only demanded full disclosure of the transaction, but also wanted commitments as to their future employment security as well as a similar wage increase. For the seller, this debacle was unnecessary since the departing employee was not considered critical to the buyer and was easily replaceable from their resources. The unrest with staff delayed both the completion and put at risk the future business plan given the increased wage demands.
Fortunately (and indeed the seller was very fortunate) this breach did not lead to any subsequent customer or supplier complications. This blatant breach of confidentiality, placed the buyer in a very weak negotiating position and ultimately resulted in his deal terms being eroded.
Similarly, a seller who required to renew his lease to a longer term to satisfy the buyer, considered that the disclosure of the deal to the landlord would accelerate proceedings. It is perhaps not unexpected that when the landlord realised his critical role to enable deal completion, sought to flex his negotiating muscles leading to less favourable lease terms for the target and resulted in the significant delay of the deal. Again, this breach of confidentiality nearly collapsed the deal and led to the seller accepting less favourable deal terms than would otherwise be the case.
The key learning is that the obligations of confidentiality are expected to be bilateral, and any disclosure without the express permission of the other party has the real potential to disadvantage you gaining a premium value for your business.
Failure to manage your lawyer
The negotiation of the sales & purchase agreement (SPA) is the end of long and tiring process and should set out clearly the agreed offer with the buyer, subject of course to any specific issues which have arisen during diligence. It is therefore for the seller and his advisor to brief their lawyer fully as to what was agreed, before the lawyer starts their task of reviewing and marking up the buyers draft SPA. This will lead to an efficient process in which the lawyer will recognize the previous agreements made between parties and seek to ensure the final document encompasses them.
Unfortunately, some buyers fail in this task, giving instead their lawyer free reign to mark-up the transaction based on their own opinion on what their client would like. The commercial and practical discussions to quickly conclude the previously agree deal, is increasingly replaced by a confrontational stance with the aim of renegotiating previously agreed points in a bid to lever a better negotiating position. It is often the case that when faced with a hostile lawyer who is seeking to reposition the previously agreed deal, that the buyer may simply threaten to walk away from the deal, which will immediately put the seller in a weak position as he seeks to both repair his lawyer’s damage and attempt to get the buyer back into the deal, often involving a dilution to his initial deal position.
The key learning is that lawyers whilst being your key advisors are being paid to assist you in completing the deal, and not just to flex their legal muscles to show-boat their professional prowess. Engage your lawyer carefully with clear instructions on what is already agreed and what is expected of their negotiating stance to ensure the efficient completion of the deal.
At Red-Swan Partners our team have extensive experience from growing and selling their own businesses, being TIC corporate’s M&A executives, as well as working with a wide range of TIC business owners to support them in the development of their own exit strategy. This wealth of relevant market experience allows us to work with business owners through their life-cycle and to best advise how to behave during a divestment to ensure you can achieve a premium value for your business