Addressing the confidentiality concerns of sharing information with the competition
Politics can make strange bedfellows, and so can business, particularly if your business is in the construction materials industry and you are looking to exit the market. Why? Because if you want to sell your business, the most likely buyer will be among your customers, competitors or suppliers. In some cases, these groups will represent your only buyers.
For owners who think of business as a win-lose endgame, this can be a mental obstacle. Jack Welch, former chairman and CEO of GE, once said, “Buy or bury the competition.” Obviously, you want to sell your business to a qualified bidder at the best price. However, what are you to do if an in-market player gains access to sensitive information but fails to consummate a deal? How do you keep yourself from getting buried?
Know what you need to protect
The release of highly confidential information can be damaging. As such, it’s only natural for sellers to want to protect sensitive data, including:
- Sales volume
- Customer lists
- Pricing (by product and/or customer)
- Materials costs (for ready mix or asphalt producers)
There are numerous risks of this data becoming public. For instance, while sales volume can be estimated, if your business has a high but under-the-radar sales volume you can attract unwanted attention from competitors. In addition, revealed customer lists can also attract more competition, and details about pricing, costs and margins can disrupt the market, bring vendor relationships under scrutiny and rock the boat with customers who do not receive equal discounts and/or feel gouged.
Install a “seller-friendly” confidentiality agreement
Not all confidentiality agreements (CAs) are created equal, and while the right CA can protect your business in this situation, the wrong CA can leave you vulnerable. Standard CAs rarely include the provisions necessary to protect sellers in these situations, and CAs generated by buyers often protect the buyers more than the sellers.
For example, a seller-friendly CA can limit the use of confidential information only for the purposes of evaluating the potential acquisition, and it may even restrict specific personnel from seeing confidential information. A standard CA certainly won’t do that.
Other common restrictions and provisions in seller-friendly CAs include:
- Establishing a length of agreement term sufficient to make confidential information outdated by the expiration of the term.
- Prohibiting the buyer from soliciting your employees and customers.
- Treating all information, in any form (oral, written, etc.), as confidential.
- Requiring the return or destruction of all confidential information, analyses or other pertinent documents.
- Prohibiting the buyer from disclosing it is negotiating to acquire your business.
- Making it easy for you to protect your sensitive information in the event of a breach.
Control the flow of information as discussions progress
It is also beneficial to control and limit the flow of information. That is, release what you need to release but only when you need to or are obligated to release it. Essentially, you want to limit the amount of sensitive information you share with a buyer to only what they need to evaluate your business or conduct due diligence. For example, you might initially limit information to sales, earnings, assets, etc., and require the buyer having to make an offer based on that information. If a conceptual agreement is reached, more detailed information can then be shared. In this instance, information sharing can again be limited to certain designated personnel.
The release of information is inevitable…but an advisor can help you control it
If you are going to consummate a transaction, there is no getting around these two facts: one, you will need to reveal sensitive information to prospective purchasers, and two, you will be exposed to risk. This is less of a concern when dealing with out-of-market buyers, but in an industry in which buyers are often in-market, these are real and serious issues. The key is to minimize your risk exposure. Delineate what information is critical at various stages of the sale process and determine what thresholds a buyer must clear before you share more sensitive information. If this is an area in which you lack comfort or expertise, consider working with an advisor. A qualified advisor will have experience both buying and selling construction materials businesses and can help you navigate these and other risks while maximizing the value in a sale.