This is the third article in our series on selling the family business. See our previous article on conducting preliminary diligence for a refresher on one of the most important things a family business can do to improve its strategic position before a sale.
After conducting preliminary diligence, the next step for the seller is to market the business. There are two key legal considerations to address in the marketing stage: (1) confidentiality concerns, and (2) the accuracy of advertising materials. These issues apply to selecting a financial intermediary—such as an investment banking firm, business broker or other advisor—to assist with the sale of your company, including initial marketing, and in preliminary communications with potential buyers.
Financial intermediaries come in all shapes and sizes. Some of the qualifications that the seller should consider are industry experience and expertise, the level of commitment the intermediary will give to a transaction of the expected size and complexity, responsiveness, overall cost, and favorable references from other businesses that have worked with the intermediary. One additional and obvious consideration is the level of experience with family businesses. The management team and equity owners will need to develop a high level of comfort with the intermediary, and communication skills with the ownership group will become paramount.
Protecting Your Confidential Information With an NDA
Whether or not you hire a financial intermediary, it is necessary to disclose confidential information about the company's finances and inner workings to prospective buyers. Since these disclosures will be made to multiple potential buyers before the seller knows which one will ultimately acquire the business, it is imperative that the seller implement well-prepared non-disclosure agreements (NDAs) to protect against improper use of the company's confidential information.
There are two aspects of an NDA that deserve special attention: (1) the scope, and (2) the term of the agreement. The scope of an NDA refers to what type of information it covers and for what purposes the recipient can use the information. As the discloser, the seller should insist on as broad a definition of "confidential information" as possible. Similarly, the seller should require that the information disclosed only be used for the purpose of evaluating the deal.
The term of the NDA warrants careful consideration. The term of the agreement is the period of time during which confidential information is disclosed in order to be subject to the agreement. Usually, NDAs have a term of somewhere between one and five years.
It is crucial to note that the term and survival period of the agreement are two different things. The survival period of the agreement dictates how long information that is disclosed within the term of the agreement must be kept confidential. The survival period of NDAs may be a specific number of years or it may be indefinite.
Accuracy Is Key
Equally important to the marketing process, whether you are working with a financial intermediary or not, is the accuracy of the advertising materials. Everything in your company's marketing materials must be accurate. This means that you must be able to empirically verify any claim about your business.
This is especially true if the claim is one comparing your business with your competitors' businesses. Such comparative claims should be independently verified by a third party. Moreover, the advertising materials should be careful about projections or predicted outcomes.
In furtherance of these goals, the marketing materials should avoid using unqualified superlatives such as "guaranteed," "maximum," "highest," and "optimized for." But let's face it, projections or "forward-looking statements" are very useful to a buyer, and most buyers will want to know what management's projections are of future business results. Your financial intermediary will almost certainly want projections from management.
The way to avoid creating problems with projections is to make them realistic—neither overly conservative nor overly aspirational—and to place legends on all projections that inform the recipient that projections are merely estimates of potential future performance and there can be no guarantee that the projections will accurately predict the future performance of the company.
It is important to note that if the sale involves the sale of equity securities, federal and state securities laws will place additional constraints on how the business can be marketed. If the offering is conducted under certain federal and state "private offering" rules, the seller is prohibited from engaging in "general solicitation."
General solicitation is defined as "[a]ny advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio" as well as "[a]ny seminar or meeting whose attendees have been invited by any general solicitation ... ." General solicitation has been broadly construed by case law, so if the sale is conducted under one of these rules, be sure to pay very close attention to how the sale is marketed.
The Bottom Line
Your advisors—including legal, accounting, and financial intermediaries—can add significant value to your business in finding the right buyer, protecting you from risks, and making sure that information you are providing to a buyer is accurate and complete. It is truly a team effort.