Be Careful What You Share With Buyers When Selling a Business

Mergers and acquisitions are complex business processes that require significant due diligence from both parties. In fact, M&A is so complex that between 70% and 90% fail, according to Harvard Business Review. Therefore, it’s critical that founders have the proper toolkit when speaking to potential buyers so they understand what’s at risk — and minimize that risk where possible.

What does a successful deal look like?

A successful M&A transaction builds on the discipline and internal organization developed during the company’s fundraising cycles. Successful founders treat each fundraising round as an iterative exercise to prepare the company’s key executives and stakeholders for the all-consuming nature of the M&A process.

Founders must balance the competing interests of running the business while also providing the information necessary for the buyer’s diligence; and eventually transferring the knowledge management necessary for an efficient post-closing integration of the acquired business into the buyer’s organizational structure.

It’s also essential to build a rapport and a trusting relationship with the key stakeholders at the buyer so that founders can lean on those relationships when negotiating critical deal issues at the later stages of the M&A process.

Related: 7 Strategies to Master the Art of Mergers and Acquisitions

What are some of the reasons that a deal will fall apart?

Several factors contribute to a failed deal: founders lose credibility with key stakeholders on the buyer side; key customers fail to renew their contracts; founders fail to anticipate risk allocation and indemnity issues; and investors are not aligned.

Founders lose credibility with key buyer stakeholders

Most startup mergers and acquisitions require the founders and key executives to work with the buyer for at least 18 months post-closing or otherwise forfeit significant deal consideration. If the buyer senses any potential day-to-day friction or trust/transparency issues, they will be more willing to walk away from the deal rather than negotiate issues that inevitably arise during a transaction.

Key customers fail to renew contracts

The M&A process is all-consuming, and founders who lose focus of the core business — or fail to appropriately delegate day-to-day oversight — risk losing critical revenue levers that can create the overall deal value for the buyer. If the buyer anticipates issues with key customers, they may walk.

Failing to anticipate risk allocation and indemnity issues

It’s in a founder’s best interest to get ahead of any issues and prepare an explanation of the potential magnitude (or lack thereof) of the downside scenarios that could arise post-closing.

Therefore, it behooves founders to conduct a thorough audit of their business to identify any major red flags that may arise during the diligence process and that may potentially create indemnity issues. However, if a founder isn’t thoroughly prepared to explain the root of a problem early in the diligence process, the buyer may insist on dollar-for-dollar indemnity on fixing the issue, and the deal may no longer be as attractive as it once was.

Investors aren’t aligned

By not involving key investors early in the M&A process, founders risk losing investor support when it’s time to solicit stockholder approval for the transaction. Founders should be aware of the valuation inflection points for investors who may have invested at various valuation points to ensure they are aware of the investor portion of the sale proceeds. Founders should also map out why this sale is the best option for the company.

Related: How Leaders Can Build Acquisition-Ready Companies

Be careful when disclosing information to potential buyers

While it’s important for founders to diligently prepare the proper information to share with potential buyers, some of that information could prove detrimental if the deal falls through.

• Customer forecasts/roadmaps: If the buyer doesn’t already sell a product to your customer base, they may use your internal customer forecasts/roadmaps to help reconfigure their internal sales targets and claim that it was public knowledge.
• Employee performance/reviews: Be careful about sharing too much information about rockstar employees; if the buyer doesn’t already know who they want to hire from your team before the diligence process, it’s quite easy for them to create a very specific job description to target those employees if the deal falls apart.
• Product development plans: Be especially careful about sharing detailed product development plans until the deal is certain to close. If your buyer sells a competing product, one of the goals of the transaction may be to eliminate you as a competitor.

How to exercise caution before the deal is complete

Negotiate a very detailed letter of intent/term sheet

If you negotiate the “big ticket” items up front (before the detailed diligence requests and providing access to internal information), there’s less of a chance that critical information will be shared only to have the deal fall apart over a fundamental issue later in the process.

Create non-downloadable or redacted versions of data room documents

If there’s information that’s particularly sensitive, make sure it can’t be downloaded for the initial phase of diligence and consider redacting key information, like detailed figures and/or customer names. Additionally, founders can request that access be limited to specific members of the buyer’s team on a need-to-know basis.

Ask for bilateral information

If the founder is receiving equity in the buyer as deal consideration, the buyer should be willing to provide information about its business to the founder. If that’s not the case, it may be a sign that the partnership will not work, and the owner should be careful about disclosing too much information upfront.

Related: From Growth to Profitable Exit — Actionable Strategies As You Sell Your Business

The bottom line

There are myriad complexities to mergers and acquisitions. However, founders can successfully navigate these complexities with the proper preparation and contingency planning.