Selling a business requires a progressive buildup of trust and transition of control. The right buyer needs enough information to price risk and proceed with the deal. Sellers need enough safeguards to protect commercially sensitive information. The art is in sequencing disclosures so both sides move forward without compromising the enterprise.
In an earlier article (“How to Protect Confidentiality and Qualify Investors”), we explained how DMA protects confidentiality and qualifies investors. This article takes the concepts further by explaining how and when to release sensitive information as the transaction progresses.
Information Prior to Agreeing Headline Terms
The Information Memorandum should cover around 80% of queries likely to be raised by prospective investors in the initial phase. The remaining items to present an offer are typically covered by a meeting and some short rounds of threshold Q&A.
It is common to provide the financial databook and supporting unadjusted financial statements prior to agreeing terms. However, most detailed records and sensitive disclosures are held back until due diligence.
Consider the Profile of the Investor
Once terms are agreed and due diligence is in progress, the extent and timing of disclosures varies depending on the profile of the investor:
• Financial investors without an existing investment in the industry may present a lower risk profile as there is less harm they can do with commercially sensitive information. This may even warrant providing their advisors with read-only access to financial systems to streamline the provision of information and reduce the number of queries.
• Strategic investors may be higher risk – particularly with access to customer, staff and supplier details. However, in many cases strategic investors will pay a premium because of the revenue synergies they can realise.
Provide Information in Tranches as Certainty Builds
The key to managing sensitive disclosure is aligning the extent of information disclosed with the progress and certainty of the transaction:
• Early stage due diligence involves the key items to arrive at a position where there are “no red flags”. During this phase, it is common for customer, employee and other sensitive information to be provided on a redacted basis with unique identifiers to enable analysis across multiple data sources.
• Operational and legal due diligence is normally after the “no red flags” milestone is achieved, and provided in parallel with negotiation of the binding transaction documents.
• Commercially sensitive items such as customer/employee information or interviews (if strictly required) are normally during the very late stages of the process when binding transaction documents are in place and otherwise unconditional. In particularly sensitive transactions e.g. between two close competitors, this “black box due diligence” process is formalised in the transaction documents.
Working with an experienced M&A advisor provides comfort for Sellers during the process. Experienced advisors know what information is normal to provide, when to push back and offer pragmatic backup solutions for sensitive situations.
Author, Blake Davis
