I've had a potential strategic acquirer approach me and ask a lot of questions about our financials. How far should I open the kimono?
Answers
How much information that you want to disclose will depend on how firmly do you think that this strategic investor will actually invest / acquire your company? Disclosing too much information might be harmful for your future business, so I understand that is your concern.
I will first start with getting a NDA signed and then providing some more details of the business to buy some time to conduct your own due diligence. You might want to act fast to do your due diligence as you will not like this investor to leave you without even taking a deeper dive into your business model.
I will suggest you doing your own thorough due diligence on this investor for the source of his funds, immediate access to the cash, future plans/ involvement, motivations to invest/acquire your particular business, what other potential targets this investor is looking at, what investments were made in the past, what is the normal structure of the investments (debt/equity), how serious is this potential investor overall (i.e. how excited does this person get on hearing your current/future plans), etc.
In certain cases, this investor might just be window shopping to get to know your business better to make a bid or to acquire your competitor's business. Hence, if I was in your shoes, I will disclose the bare minimum till the time I have completed my due diligence on this potential investor. Also suggest that you stay calm throughout the whole process. All the very best!
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Your NDA is one key element. A second item to help would be a Letter of Intent. Depending on the seriousness of the buyer, a non refundable fee applicable to the final purchase price may also help. Caution is always rendered in sales agreements not to give away items behind the corporate veil that may deplete competitive strengths should the deal not close.
I'll echo all of Sunil's comments as they are all good advice to use. I'll also add two other points that we've used in these types of situations. When we've been approached by a potential investor/acquirer, I've offered general information about our firm such as our business model, our target markets and other non-critical data that is already public info to anyone doing a Google search on our firm. I consider the
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Thanks for your comments Scott.
That is what I also intended to say, i.e. not to disclose anything without a proper NDA being executed. However, at the same time the strategic investor should not feel that he is being ignored. Hence, suggest keep on disclosing all the publicly available information that might not be readily available to the potential investor till the time the NDA is executed.
The bottom line is strategically disclose the information and at the same time collect the information about the potential investor. Once the NDA is executed you can share the non-public information.
As a caveat also ensure that the NDA has been reviewed by your attorney and not just sign the NDA provided by the potential investor's.
Obtain a signed non-disclosure agreement [see a lawyer], and you can disclose what you choose with minimial concern.
I echo the comments above, but add that I believe this is a process. Disclose in stages -- general at first, some specifics after a well-crafted NDA is in place and then get a letter of intent, preferably with a deposit against the purchase price, refundable only if a material undisclosed fact is discovered during due diligence. A deposit will flush out the tire kickers and if they are serious and know that the deposit is refundable if they discover a true problem, how can they argue? I've handled deals on this basis and never had a refunded deposit (of course, I ensured that my employer or my clients didn't withhold a material problem from the potential buyer).
I agree with all of the a above, but first what is your strategy? If you just want to cash out, that is one thing , but if you are looking for a strategic partner to support the development of your product then you have a lot of work to do. About 80% of "strategic acquisitions" fail because of the soft issues. Establish some carefully crafted criteria for a strategic partnership and if the prospective buyer doesn't
meet them, then show them nothing. They do these deals every day, you will do this deal once. They already have that which is public and you should protect the non public information until you are comfortable that they will be a good strategic fit for you. At that point get a tight NDA crafted by an attorney you trust then go forward getting as much non public information from the buyer as you give to the seller. What is the proposed new structure? To whom do you report? Ask to speak to the last three CEOs of firms they have acquired. What did they like and what did they not like about their deals? If they refuse ask them why? What are they afraid you will find out? Bottom line: question everthing?
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Hi Walter....you raise very interesting point - FIRST things FIRST - analyze what you plan to do before you start executing.
Most people just jump in the water (i.e. start spending too much in analyzing the details) without questioning as to their own potential strategy.
If the strategy is to cash out, you do not need to spend too much time analyzing the future of the company you sold. The only thing you need to analyze is it timing - do you want to make the deal NOW or wait for certain time in the future to exploit the full value of the business.
However, if it is a joint venture type of an arrangement, more than the financials, soft skills are the key. How can you work in developing a business jointly with someone if you cannot see eye to eye with each other? Also it is also crucial to understand the vision of the potential investor so that it matches with your vision. If the vision does not match, more time will be spent in convincing the other party your point of view rather than building the business.