Tailoring M&A Strategies: Customizing the Deal for Different Buyers

How can a business protect itself when engaging in a sale process with a competitor - while keeping the process going?

And does the sale process look the same regardless of who the buyer is, or should the process be customized?

Companies and business owners are sometimes approached by competitors who express an interest in buying the business.

Even if management is not ready to sell right away, taking the call and "testing the market" is hard to resist.

This decision is not without risks, however.

As a seller, the company will need to share confidential and sensitive information with the buyer. A strategic buyer could use the information to learn trade secrets, customer information or commercial (e.g. pricing) information that they could use against the target even if the sale process falls flat.

So how can the seller protect itself in this situation - while keeping the process going?

Here are some thoughts:

1) When approached by a potential buyer (especially a strategic) consider if proactively broadening the process is appropriate:

Companies sometimes receive inbound inquiries to sell the business. And sometimes those happen to be from a competitor (or someone who looks like they could be a competitor).

Going exclusive with one specific buyer, especially a competitor is rarely a good idea.

Why?

Because the sale process is very demanding (both from a resource / mind-share perspective as well as from a deal cost perspective). Investing a lot of effort into working with one buyer, only to have the deal not work out is rarely a good use of resources.

If the business is seriously ready to sell, it might be a good practice to hire an advisor who can help package the company and take it through a broader process - which can both increase value and the odds of closing a deal eventually.

2) Stage the buyer outreach process from low to high-risk buyers

Start the process by talking to private equity (PE) buyers. Sequence strategics or direct competitors towards the end of the process.

This approach has two benefits:

1) It helps the company to polish up its story, the presentation, and the ability to explain the business to buyers who are less familiar with the company and industry.

Strategic buyers, who are familiar with the industry, tend to have more detailed questions - and working through the more basic materials and questions with other buyers will serve as practice sessions for both the management team (as well as the advisors, accounting firms, or corporate development teams involved).

2) It sometimes yields indications of value through initial conversations that could baseline the market value.

PE and non-strategic buyers generally represent the valuation floor because they (generally) do not bring additional synergies that increase the business value to them.

3) Screen unfamiliar buyers

If an unfamiliar buyer approaches the company as a potential acquirer, consider additional steps to screen them before engaging, including:

1) Asking the buyer to complete a "buyer question list" that asks the buyer to provide written information about their financial position, ability to finance the deal, and past acquisitions they have made

2) Search public records to uncover any red flags (e.g. litigation or other past issues) that may suggest the company should disqualify the buyer from the process

3) If the buyer is a competitor, the business is likely to have a sense of the reputation of the buyer in the marketplace. Ask business and commercial leaders within the business for their opinion about the potential buyer (without disclosing the intent of the questions of course).

This step serves to (i) avoid spending time and resources engaging with a buyer who will ultimately not be able to close the transaction and (ii) avoid company confidential information from being needlessly shared with unqualified buyers.

4) Tighten the NDA process

Have a competent legal team prepare

(i) an NDA that is generally sufficient for most buyers and

(ii) a stronger NDA for use with strategic buyers and competitors

The right legal counsel will be able to draft these thoughtfully but generally, the NDA used for (ii) should be much tighter when it comes to more sensitive topics such as:

• Definition of confidential information
• Definition of "representatives" or "advisors" that the buyer can bring into the process.
• Non-solicitation of employees, customers, or suppliers
• Including a longer term for the expiration date

Also have the buyer to get their representatives to sign the NDA before being allowed to engage in the process

5) Stage the information that is disclosed to buyers

In a broader process, its highly advisable to hire an advisor or a consultant who can prepare materials (the "Confidential Information Memorandum" or CIM) that explains the business to buyers.

The CIM generally covers ~80% - 90% of the most relevant information that should be sufficient for a buyer to know if they want to proceed with further diligence.

The CIM usually covers the below high-level themes that can be generally shared with qualified buyers who have signed an NDA:

• Company Overview
• Investment Highlights
• Industry Overview (especially useful for PE buyers)
• Business Overview (including Product, Sales and Marketing, Management team, and Organization structure)
• Financial Overview

After "down-selecting" the buyer pool who have reviewed the CIP and who can put down reasonable non-binding indications of interest, information such as customer or supplier names or contacts can be shared but in a much more gated manner.

6) Invest in a built-for-purpose data room

Sometimes sellers try to save a few bucks by using a "shared drive" type of software during the process.

This almost always comes back to bite the seller later on in the process.

In most M&A situations, investing in a data room (Intralinks and Datasite being two good ones I'm familiar with) that can appropriately watermark files, prevent downloads of sensitive files, log granular access and clicks, and restrict access user by user is worthwhile.

7) For extremely sensitive confidential information, consider hiring a neutral third-party firm to conduct targeted diligence

Strategic competitors often have large teams (50-100 people) from the buyer side alone, performing diligence.

And this opens up the target to risks around having their information openly shared across the buyer team, and an NDA might not be able to really provide the protection the buyer needs.

In these cases, it sometimes makes sense to hire a third-party company that will perform a targeted diligence study and withhold information deemed very confidential by the seller. Examples could include details about specific customers or software code that goes into critical parts of a technology product.

If you've been involved in or supported an M&A process (either as a buyer, seller or an advisor), what are other adaptations or protections that you might recommend?

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