Confidentiality. This is perhaps one of the first words spoken in a conversation between an entrepreneur who has decided to sell their company and those to whom the decision is revealed, including the advisors in the transaction process. You are not wrong to demand confidentiality, as this is key to the success of the operation.

Throughout this article, we will explain why confidentiality is essential, the role it plays at each stage of the process, and how to enforce it.

Why is confidentiality necessary during the whole sale process?

Confidentiality: with whom and to what extent?

Confidentiality is undoubtedly the cornerstone of any company purchase or sale transaction. Therefore, in any corporate operation, the confidentiality agreement (NDA) must start from the first moment, even when the entrepreneur has the idea in their head but has not yet decided to carry it out. If you follow this recommendation now, you will save yourself from upset in the future.

You must inform certain staff members of the sale, as they will be part of the sales process. A few key members must have the information, usually the CFO; but remember to do it intelligently. You must make sure they keep the transaction secret by having them sign a confidentiality agreement when you tell them.

With this transparency and gesture of trust, you avoid suspicions arising when asking them for information. You will also reduce the possibility of them mentioning it to their colleagues. Usually, they will repay the trust you have shown them. It would be best if you did not discuss it with anyone else.

Non-Disclosure Agreement

Confidentiality allows the parties involved (advisors, buyers, sellers, etc.) to share information in the transaction without any external agent discovering it.

The mechanism that guarantees confidentiality in this type of operation is the Non-Disclosure Agreement (NDA). Previously, potential buyers who have been qualified to carry out the transaction, have a strategic plan and sufficient resources, have been provided with a blind profile, and have shown interest in moving forward with the potential purchase.

At ONEtoONE Corporate Finance, we only deal with large international groups when dealing with potential buyers. They have professional teams specialized in corporate transactions that are very clear about the importance of confidentiality.

Compliance with the NDA implies the non-disclosure of the information received (transmitted and perceived by observation). Confidentiality is an essential tool, especially nowadays. Be careful: new technologies make information much more accessible and immediate.

The signing of an NDA obliges the parties to monitor compliance with a series of obligations concerning the information transmitted, not only at present but also in the future. Non-compliance by any one of the parties can negatively affect the operation’s development and closure.

Risks of information leaks

But what happens if the information is leaked?

Transaction price variation

It is not uncommon for a market rumor to change the price of a stock. This leakage of information can overturn the initial strategy defined. On some occasions, both parties have even had to abandon the closure of the transaction.

The exit of key professionals from the organization

The management team and key people in an organizational structure may feel threatened by the proposed transaction long before the new partners arrive and explain their new intentions. Losing these professionals can be detrimental to the operation, as the buyer may back out or lower the price due to the loss of value implied by the loss of key people for the company.

«It would be best if you put in place means to prevent managers from leaving during the negotiation phases.»

One measure we have applied on occasion with the business owner has been to inform critical managers of the idea of a sale in two years and reward them with a percentage of the transaction’s value, encouraging them to work together to improve financial ratios during this period.

Other times, we define a price that we consider reasonable with the employer and indicate to the managers that they will receive a percentage of the increase on that price. Therefore, they see a clear benefit in making a significant effort for the company, since they become business owners, to a certain extent, and we guarantee that they do not leave you by surprise before closing the deal.

Confusion in the workforce

From the beginning, rumors of a new shareholder can generate nervousness among employees. This can affect their work performance and, therefore, the company’s financial results.

Concerns of customers, suppliers

News of a new shareholder situation may cause uncertainty for customers, as they do not know whether they will still be able to continue to depend on the company’s products and services, as well as for suppliers, as they do not know whether they will be able to rely on the approval of the new owners.

Without M&A advisors, it is tough to maintain confidentiality and carry out a rigorous search process for the best buyer. If you do not give exclusivity as advisors to a firm specializing in companies’ sales, do not expect confidentiality either. You cannot expect two advisors to compete to find a buyer and simultaneously do it confidentially.

Managing confidentiality during an M&A transaction

Managing confidentiality is a crucial aspect of a transaction of this type. The first people to be required to maintain confidentiality are the advisors themselves. Even before signing a mandate with them to sell your company.

It is standard practice for advisors to send a confidentiality agreement to potential clients. In it, they commit themselves not to disclose any of the information provided, regardless of whether or not they subsequently sign an advisory contract.

If you are considering the sale of your company and are contacting different advisors, do not hesitate to request this confidentiality agreement to safeguard your sensitive information and future operation.

Focusing on the buying and selling process, sellers usually look for higher confidentiality levels, but this depends on many factors and can vary.

For example, if the seller wants a high level of confidentiality, they must reduce the number of potential buyers reached, which will slow down the sales process.

On the other hand, if the seller is looking for faster results, they must broaden the potential buyers’ selection, making it more difficult to control the confidentiality factor. This may seem like a conflicting contradiction to any seller.

Strategies to guarantee confidentiality

It is possible to use different techniques during the buying and selling process to increase confidentiality, but many business owners are not even aware of them. Here are some of these techniques:

The creation of a Blind Teaser

The Blind Teaser is a document designed to protect the company’s identity from being revealed upon presentation to potential investors. The teaser reveals the company’s status, but not its name. The buyers who show interest must sign a confidentiality agreement to protect their identity.

The signing of an NDA

Confidentiality is crucial from the first day. There will be many agents involved in the process. Everyone exposed to this information must sign an NDA so that the idea and intent are protected and secure.

Letter of Intent

The Letter of Intent (LoI) is a document in which the buyer and seller put in writing the main points of the agreement they have reached. This text must include all relevant details:

• Type of transaction: capital raise, purchase of assets and liabilities (and which assets and liabilities), or shares.
• The price.
• The percentage of the company acquired.
• The methods of payment.
• Payment terms and deadlines.
• Price adjustment formulas.
• Other types of remuneration.

The confidentiality of the agreement and a period of exclusivity (in which the seller cannot negotiate with other buyers) are also agreed upon while the Due diligence and the purchase and sale contract are being developed.

Virtual Data Room

If a deal has reached the point where is necessary to create a Data Room, it means that we are close to closing the deal. In other words, we are at a sensitive point where confidentiality is vital. Hence why the Data Room is designed to protect the information. They create a virtual space where the seller will hand over all the necessary documentation to the potential buyer in order to proceed with the transaction. Information delivery is done through online software that prevents printing of the contained documentation, avoiding uncontrolled data leaks.

How does the Virtual Data Room contribute to confidentiality during the sale process?

A Virtual Data Room (VDR) is a virtual space where the seller uploads all the necessary company documentation so that the buyer can have access to it and progress with the process.

This information transaction is extremely sensitive. It should only occur when both parties have reached a reliable and trusting relationship. At this point, the willingness of both parties to invest and close a transaction is implicit.

This information transaction is carried out through software designed to avoid any revelation of documents and to maintain the safety of uploaded documents. The software must be a high-quality product that provides confidence, security, and safety to both parties involved in the operation.

Imagine how difficult it could be for a business owner to expose the essence of his company. Aside from the emotional factors that make this operation difficult, this part of the process must meet all the requirements to guarantee security and peace of mind between the parties.

At ONEtoONE, we handle our clients’ transactions with transparency, confidentiality, and professionalism. One of our best allies is the trust we generate through our work. Therefore, we encourage you to contact us if you are looking for advice on your company’s sale/purchase. And remember, confidentiality is the key to success.

The first thing to understand is how many professionals you need to sell a company: a financial advisor, a lawyer, a tax advisor and a notary are the crucial figures. As you can see, many individuals are needed, and each one charges for their services in some form. When you decide to sell your company professionally, you will have to ask them about their fees.

[If you want to read more about the different figures involved in the process of buying and selling a company, read the following article: Whether Buying or Selling a Company: Pick the Right Advisor  Or this one: Why is it important to have an advisor?]

We are going to focus on the financial advisor, our role in the process, the first link in the chain and the one that will accompany you in understanding how much it will cost to sell your company.

Generally, when you contact financial advisors to discuss your company’s sale, you will find there are two types of fees: fixed fees and success fees.

Fixed fees or Retainers

Fixed fees or retainers are charged regardless of the outcome of the process. They are commonly associated with documentation delivery or with the achievement of specific landmarks during the sale process [Read more about the operation of a company’s transaction in the article The selling process of a company]. It is not uncommon for the advisor to offer to deduct these fixed fees from the success fees. The truth is that they usually only represent a tiny part of the total costs in the event of a deal closure. However, they are still a cost that the business owner must “advance”.

The controversy around fixed fees is their relevance, that is, should I pay them or not? This doubt arises because some advisors work only on a success basis. There is a proverb that says: “What does not cost is not valued”, and another: “If you pay peanuts, you get monkeys” or “You get what you pay for”.

When a business owner starts the process without spending a penny, they have not embraced the sale of the company and they will always be tempted to pull out at any time. Also, a business owner who does not trust their advisor will think that if they have not made the right choice of advisor, at least they have not spent any money. Perhaps the business owner has repeatedly heard cases of friends saying “they charged me and did nothing”, or perhaps they have already experienced it themselves. While we cannot guarantee that this will not happen, most of the time this lack of professionalism occurs when the transaction has been put into the hands of people who do not work exclusively in this profession. There are some excellent professionals who will dedicate many hours to the sale of your company:

• Ask your lawyer, your tax advisor, a competitor who has already sold, or search on the internet for reference.
• Even if you believe that you have found an advisor in your first meeting, try to obtain a few different proposals and compare them.
• Remember that you are only going to sell your company once.

[Read more about the importance of advisors in this article: Why it is essential to have an advisor?]

Let us go back to the option of not paying fixed fees, but now let’s look from the advisor’s side. Not having an initial fee in the process will also affect the advisor and could generate a conflict of interest in the long run, as they may want to close a deal at any cost and without considering whether the chosen buyer is the best option for their client. This would, in part, be due to the advisor’s fear of not closing the transaction and thus not obtaining any fee (if everything is dependent on success), despite having given away time and work.

Negotiate hard, defend your money, and make sure they will protect your interests, but always seek a fair agreement for both of you.

But what is fair? This is a question that has no easy answer, especially when, as in our case, we sit down with companies that go from 5 million in revenues to 500 million. Each of them has different peculiarities and complexities. But what we can say is that at ONEtoONE, each project no matter how small, will have at least two people working on it and could have up to ten.  Think about the cost of a senior employee in your company and the hours that they will dedicate each month to a project, and you will have a very rough idea of the price range for fixed fees.

[If you want to know more about how long it takes to sell a company, read our article How long does it take to sell a business?]

Success Fees

These fees are understood and accepted by all clients. Their name says it all; they are obtained upon the completion of a project, whether that is selling or buying a company that you have been looking for.

However, they can also be complex to calculate. In the sale of a company, the norm is to pay a percentage of the company’s agreed value, since the higher the price achieved, the greater the reward for both the client and the advisor. And what is the percentage rate applied? Again, this is difficult to answer, but there is at least a commonly accepted rule: the rate will be inversely proportional to the transaction size; that is, higher percentages will be incurred in smaller transactions, and lower rates will be incurred in larger transactions.

Do not get carried away by what a friend who has read in a newspaper about a large transaction tells you, because that is another league. The purchase/sale of a family company is not governed by the figures of Nasdaq-listed companies. The risk of selling, or rather not selling, a small or medium-sized family business is much greater than in large multinationals. For greater risk, there is a higher cost. The range of rates is very wide for family companies, and usually goes from 1% for large transactions to 6% for small transactions, based on the transaction value.

Make sure you demand that the rate applied to your transaction is justified. To avoid surprises about how much it will cost to sell your company, grab a calculator and with an estimated value of your company, do the calculations to avoid scares or misunderstandings in the future.

If you have got this far, the ‘it depends’ answer that we used at the beginning of the article to respond to how much it costs to sell your company should already be clear. Now all that remains is for you to put pen to paper. Contact us and tell us about your case with complete confidence, in a confidential process and without any obligation from you:

The information in this form goes only to our team of advisors and is treated confidentially. We will contact you at the phone or email that you have left us confidentially, so make sure that it is yours. If you prefer, we will send you a confidentiality letter. Then we will ask you about your company’s activity, financial numbers from the last few years, the reason for the sale, who the shareholders are, and what your price target is, among other questions. Keep this information handy and in electronic format because we may ask you to do a convenience analysis and establish a proposal. All of this may take a couple of weeks and will be at no cost to you.

Have you bought, or sold, a business lately?  If you did, how do you know if you received optimal value on the deal? Did you ask an M&A advisor? It can take years before the value gained can be objectively measured, or even whether the result was a business success. Recent McKinsey and Harvard research shows that nearly 90% of all M&A deals fail to deliver the value expected or achieve their M&A goals.  How can this be? Several factors lead to poor M&A results.

In the next article, we will discuss the importance of having an M&A advisor in your company’s transactions. We will also discuss the most critical aspects of doing their job well from the advisor’s perspective.

Pick the Right advisor in your company’s sale

Paul Hager, Partner at ONEtoONE Corporate Finance, speaks from experience. As someone who has bought companies as a member of the Fortune 500 investment committee and as a valuation and investment advisor to M&A clients, he has found that the team you select to be your investment advisor plays a significant role in the amount of value created in the deal. He has listed characteristics that exist in all exceptional advisors. You can find them below.

An exceptional advisor:

Asks “Why?”: The “5 Why” method states that clear insight leads to the best decision and that insight is likely to come after you’ve assessed answers to five iterations of “Why?”. An exceptional advisor asks “Why” to continuously validate assumptions, eliminate wasted effort, explore new deal options, and sustain deal focus.

Understands your business: The M&A advisor must have an empirical view of current and future industry trends, enabling technologies and interdependent industries that significantly increases the value ceiling.  As a result, they will develop an optimal set of investment candidates for each client.

Spearfishes: An exceptional investment advisor will find those investors and companies that most value a specific client’s offering. Using the “5 Whys” and other analytic methods (e.g., Porter’s 5 Forces) to build a well-defined target profile, the advisor will quickly identify ideal matches for each client.

Leverages global reach and local insight: A good advisor will leverage an expansive global investor network that connects multiple industries. An effective N&A advisor will leverage access to trusted M&A colleagues with a deep understanding of financial markets, industries, and companies in each region of the world. This allows them to open discussions with new investors and corporate networks that promise to hold a most significant interest in the deal.

Takes business, personally: A good investment advisor is continuously mindful that M&A success depends on people to embrace and support implementation – before and after the deal. Applying the previous four facets helps create and expand deal value.  An exceptional investment advisor knows that business is personal and that its most significant value asset must be supported, nurtured, and challenged. The only suggestion of Paul Hager is that you chose an investment advisor who also possesses the five qualities mentioned above.  If you do, you will capture exceptional value in your deal.

If you want to continue reading about the opinions and experiences of our partners, please click on the following photos and access their interviews:

Why many M&A advisors are not sufficient?

Being an M&A advisor is not an easy task. We have just talked about the characteristics that a good advisor must have to be hired for your company’s transactions. But it is normal for a business owner who thinks about selling his company to be afraid of hiring advisors.

It is a crucial decision, there is a lot on the line, and many things are going through his head: “Are they going to fight for my best interest? Do they have a large enough contact base to sell this? What if the charge me a lot of money, make us work, play around and then nothing happens?”.

It is true, a lot of “advisors” do not do practical work. They are good at documentation, valuations, analysis, etc. But they do not know how to locate the right buyer; they do not have the technical and human resources needed, so they cannot spend the necessary time to find the right buyer. That is why, regardless of their efforts and excellent skills, they fail to sell your company and let you down.

According to our Chairman of ONEtoONE Corporate Finance, Enrique Quemada: “Our experience in dealing with more than 1500 mandates has shown that 70% of the outcome of a business sale is based on an extraordinary amount of work on the buyer search and contacting of the key decision-makers. That is an intensive and heavy workload that cannot be done by a small team or a single advisor; the reality is that without a strong support system, they will not be able to do it”.

If this is your company and is the most critical transaction of its history, you deserve an elite team working to maximize the transaction sale value.

If you want to sell your company, make sure that the advisor you choose can provide you with this level of search capabilities to find your buyer and beware of the buyer who attacks your advisor.

If you sell a business, I warn you that buyers know that advisors play a very relevant role for the seller, and some will try to bypass them and speak directly to the company owner. We had the following experience: “Once the conditions for the contract and a deadline to sign the SPA had been set, the buyer asked to have a personal meeting along with our client. The buyer asked for a 30% payment deferral in the meeting, and our client agreed. The next time we met with him, he told us what had happened. When we asked him what guarantees they had given him for this payment, he did not answer. He had not gone into detail with the buyer, and he soon realized what a mistake he had made not having his advisors with him when making concessions”.

In some cases, a buyer tries to gain the client’s trust and encourages him to forget about his advisors, insisting that things will be smoother if they speak one-on-one. I recommend that you never fall into that trap. A trap set up without a doubt to negotiate with a less experienced person to get a better price.

How can the advisor help his client?

For an excellent professional dedicated to clients’ advice, such as a lawyer or a financial advisor, it is vitally essential to advise and guide him towards the best possible decision. When a business owner asks for advice on his company’s future, the advisor faces two types of clients: those who want to sell their business but do not know-how, and the ones who should sell their company but do not know it yet. What both business owners have in common are significant reasons to sell their businesses. These reasons tend to be:

• The proximity of retirement.
• It is unable to keep up with competitors.
• Lack of sufficient resources to implement the latest developments in his sector.
• Personal reasons such as health issues, being tired after years of hard work or the desire of spending more time with family and loved ones.

As a professional, the lawyer or a financial advisor’s responsibility is to recommend his client a great expert in M&A. Here is where in ONEtoONE, we want to help these consultants and give them the reasons we are the best companion for their client during his M&A process.

ONEtoONE: the best choice of advisor for your M&A transaction

At ONEtoONE, we are a firm specialized in M&A that supports our clients throughout the entire sales process. We offer a 100% specialized service to maximize its value and thus create interest and competition for it. We achieve this thanks to our international team of financial and sectorial experts. Our cutting-edge technology has allowed us to develop a proprietary methodology and developed our proprietary methods.

We guarantee the clients that we will always comply with our three pillars during the sales process: methodology, competence, and transparency. ONEtoONE applies its values and methods in all its services: sale and purchase of companies; mergers, business valuations, investor search, strategic financial advice, and financial advice.

If you are interested in any of our services, do not hesitate to Contact us.

I want to recommend ONEtoONE to my clients

If you are interested in recommending us to your clients after knowing a little bit more about us, doing so is very simple. Just follow the next steps:

As an owner, you may have considered selling your company, but you are unfamiliar with the procedure and are baffled by the technicalities involved. As specialists in the sale and purchase of companies, we help you understand the sale’s main stages.

The operation of buying and selling a company is a complex process that requires a team of advisors specialized in the company’s sector of activity. In general terms, the sale is structured in 6 stages: documentation, search, marketing, offers, agreements and closing. The following infographic will give you an idea of these six stages.

The transaction can take from 6 to 12 months. Its success depends mainly on selecting the best candidates, channelling the negotiations guaranteeing confidentiality and closing the most advantageous deal.

If you decide to count on ONEtoONE in this process, our advisors will work to obtain the highest profitability from the sale of your company and be by your side every step of the way.

About ONEtoONE

If you are looking to optimize the value of your investment within an operation, I encourage you to evaluate ONEtoONE Corporate Finance: a firm dedicated to provide the highest value services to their clients through transparency and professionalism.

At ONEtoONE we have a broad knowledge of the Mergers and Acquisitions sector, as we have participated in more than 1000 mandates. Our company is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company,
contact us.