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It is natural for a business owner to be reluctant to let anyone know they are selling their business.   Many do not even want their key managers to know until the deal is done.  Maintaining confidentiality and keeping the sale process from becoming publicly known allows for controlled and managed communication with key stakeholders including employees, customers and suppliers which helps ensure a successful transition of ownership.  There is, however, a good reason to bring key managers and information “gate keepers” into the sale process from the beginning.   Having the key management team involved in the sale process and exposed to the buyers can help increase the deal value and significantly reduce the closing risk.

Business owners who are thinking of selling need to consider the importance of their management teams and include them in the sale process.  Owners will benefit from:

  • Better positioned opportunity leading to an increased sale price;
  • Greater recognition of corporate goodwill resulting in a better price and more cash on close;
  • Faster, more efficient, and discrete process to ensure the deal stays out of the public domain; and,
  • Reduced risk to close.

Positioning the Opportunity

In marketing an opportunity CCC critically looks at all aspects of a client’s business and its future opportunities and then highlights the salient points on why a given business is unique, has competitive advantage(s) and will continue to generate its expected profitability and cash flow.  The best marketing processes not only make compelling representations about the business for sale but can support them.  It is critical for the potential buyers to understand and believe there is something interesting and compelling about the business for sale to gain their attention and interest.

Having key management involved at the start of the process ensures that a more granular level of execution detail and facts can be incorporated into the sale’s marketing process.    By positioning the opportunity in the best manner possible and by having a full and complete knowledge of the client’s business there is a greater chance of gaining the attention of more buyers leading to more competitive friction in the auction process and a better outcome.

Corporate Goodwill vs Personal Goodwill

For entrepreneurial lead organizations one of the greatest factors driving value and structure of a deal is the concept of personal goodwill vs corporate goodwill.   How critical is the entrepreneurial owner to the success of the business?  In situations where key customer/supplier relationships or intellectual property/technology knowledge is only in the hands of the entrepreneurial owner who is looking to sell, buyers will deem that any goodwill related to the business is more the personal goodwill of the owner then the business.   The likely outcome will be a lower deal price and higher degree of contingency tied to the transition of the business.

Situations where more of the goodwill of the business is institutionalized within the company and the key drivers of the business are spread amongst the team instead of in the hands of the entrepreneurial owner, higher values will be achieved because the buyers will conclude that they are acquiring the goodwill of the business.   Having the management team involved and exposed to the buyers during the sale process will demonstrate the institutionalization of goodwill resulting in a better outcome for the owner.

Transition Risk and Sustainability of Profit

Another aspect of the corporate vs personal goodwill theme is the transition risk of the business and the sustainability of profit.   The lower the perceived or actual risk that the profitability and cash flow of the business will decline after closing the lower the transition risk that will be assessed by the buyer.   The value placed on the goodwill of the business is inversely correlated to the transition risk of the business.   Having the continuation of a strong management team after a deal closing ensures lower transition risk for the buyer which leads to higher goodwill value.   Many buyers take the view that they want to learn the business before making any significant changes post-closing.   Having confidence in the existing management team is a critical part of reducing transition risk.   During the M&A process the best way to build this confidence is to have management directly exposed to the buyer and be actively responsible for responding to and interacting with the buyer during the different stages of the sale process.

Confidential and Discrete Collection of Information

As CCC prepares to market the opportunity, respond to buyer questions, or facilitate due diligence there is a need for the collection of detailed corporate information such as financial information and data, information on customer/supplier relationships and contracts, payroll details among others.  Through final due and the legal agreement stage there is a need for very granular details about all aspects of the business.   Much of this information is under the purview of management and key employees.

Although many business owners think it is counter intuitive to maintaining a discrete process by bring managers into the fold there are key benefits:

  • Information is collected discretely by managers thereby reducing the risk the internal staff becoming aware of unusual activity leading to suspicions;
  • Better positioning of the opportunity is achieved by extracting knowledge from both the selling shareholder and their key managers; and,
  • The sale process is completed faster which reduces deal risk and risk that the deal is leaked out into the public domain.

Risk to close and confidence in the due diligence

In today’s deal environment due diligence is becoming ever more comprehensive covering all functional aspects of a business at a very granular level.   Having the key management participate in the process significantly reduces the risk of the deal not closing by providing fast and comprehensive responses to queries and issues that arise during due diligence.  Management’s participation allows for:

  • Faster and more discrete information gathering;
  • Buyer confidence that there are no unknown risks;
  • Increased buyer confidence in management’s capabilities reducing concerns of transition risk; and,
  • Greater protection for the seller from indemnification issues by ensuring full disclosure related to representations and warranties negotiated in the purchase agreements

Conclusion

Business owners who are thinking about selling need to consider whether they have a strong management team or functional managers and how they will be involved in the sale process.   CCC recommends that these key people be involved.   There will be a better outcome for the owner not only with respect to price but also with respect to terms and conditions and closing risks when key management is involved.

Owners will benefit from:

  • Better positioned opportunity leading to an increased sale price;
  • Greater recognition of corporate goodwill resulting in better price and more cash on close;
  • Faster, more efficient and discrete process to ensure the deal stays out of the public domain; and,
  • Reduced risk to close.

As a last thought it is not uncommon for our clients to set aside a special one-time bonus payable on deal closing to their key managers involved in the sale process as a thank you for their efforts to build the business and help get through the deal process.    It helps keep everyone focused and motivated on the final objective of the sale process, which is an optimal outcome for the business owner.

Robert Bird

Rob Bird
Managing Director, Toronto

Rob joined CCC in 1997. He has been in corporate finance for over 25 years and has been involved in more than 100 successful transactions. Rob has advised clients on acquisitions, divestitures, private equity recapitalizations, intellectual property licensing, and financings, including senior debt, subordinated debt and equity financings.