Matt Gilbert
July 17, 2024
Imagine a scenario where a business owner in the lower middle market is approached by a prospective buyer interested in acquiring their company. It's an exciting moment, but before celebrating, it's crucial to understand a vital aspect of the M&A process that often gets overshadowed by the thrill of potential dealmaking – confidentiality.
Confidentiality is an essential component of risk management that helps ensure the M&A process runs seamlessly and helps to safeguard the deal from falling apart prematurely. But why is maintaining confidentiality so critical, and what could happen if it is breached?
In this issue of GaP Insights, we explore these critical features in detail.
To begin, confidentiality protects the interests of all parties involved in the M&A process. Consider the repercussions if word of a potential acquisition leaked to competitors, customers, vendors, or suppliers. It would likely cause chaos. Employees might start leaving, customers could lose faith in the company's stability, vendors might demand immediate payments, and competitors could exploit the situation to their advantage. In short, it would be a disastrous scenario.
For example, take the case of a lower middle market company negotiating with a potential buyer. In a moment of enthusiasm, the owner confided in a trusted employee about the ongoing discussions. The news quickly spread throughout the company, causing widespread panic and confusion. Employees began updating their resumes and seeking new job opportunities, while others felt resentful about being left out of the loop. The owner had to perform significant damage control to manage the fallout and salvage the situation.
The impact of a confidentiality breach extends beyond employees. Customers may start questioning the company's stability and consider taking their business elsewhere. Vendors might hesitate to extend credit or provide services, and even the landlord could see an opportunity to increase rent on the new owner. The community might lose confidence in the leadership and the ability to grow the business. Competitors are always on the lookout for any weakness to exploit. If they learn about a potential acquisition, they could use the information to poach top talent, undercut prices, or launch campaigns to sow doubt among customers regarding reliability.
It is essential to involve only those individuals who absolutely need to know about the potential sale or acquisition. This selective approach minimizes the risk of information leaks. The group should be kept small, and information should be shared strictly on a need-to-know basis. This ensures that critical details are only accessible to trusted and essential personnel.
Protect sensitive information by ensuring that all individuals privy to the details of the potential deal sign non-disclosure agreements (NDAs). These legal documents are crucial in safeguarding the interests of the business by legally binding the parties to confidentiality. NDAs should be thorough, covering all aspects of the information shared and penalties for breaches.
Discussing the deal in public places or over unsecured communication channels significantly increases the risk of leaks. It is prudent to hold meetings in private settings or use secure communication methods, such as private emails or dedicated private platforms. This precaution helps to prevent unintended eavesdropping or accidental dissemination of sensitive information.
Despite best efforts, leaks can occur. It is wise to have a contingency plan in place to address such situations promptly and effectively. This plan should include steps for internal communication to reassure employees and stakeholders, as well as external communication strategies to manage public relations and mitigate any potential damage.
Working with an experienced transaction advisor can provide invaluable guidance throughout the M&A process. These professionals help determine the optimal time to inform employees and other stakeholders about transition plans, ensuring that information is disclosed strategically and on the owner's terms. Advisors can also assist in navigating complex confidentiality issues and mitigating risks.
Maintaining confidentiality is not solely about protecting individual interests; it is about safeguarding the value of the business, the future of the business and the livelihoods of all those who depend on it. Breaching confidentiality can lead to significant disruptions, including loss of trust, employee unrest, and competitive disadvantages. Therefore, it is crucial to approach the M&A process with a commitment to discretion and strategic information management.
Next time there is a temptation to discuss a potential sale or acquisition, consider the far-reaching consequences of a confidentiality breach. Employees, customers, vendors, competitors, family, and the community will appreciate the careful handling of sensitive information and the stability it brings to the business environment. By prioritizing confidentiality, business owners can ensure a smoother, more successful M&A process.
If any of this resonates with you, we encourage you to complete our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.
Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle and middle market business owners from coast to coast through representation for Mergers & Acquisitions Matt Gilbert and Bret Pardue established GaP to provide owners of privately-held businesses – those businesses generally enjoying annual revenue of $10-$100 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.
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