When an interested acquirer approaches you, they will naturally ask for as much information as you are willing to give them. But how much and what type of information should you provide before you know the key terms of their proposed offer? The answer is, it depends. Also realize that I’m always initially skeptical when another company approaches with the desire to talk about potential acquisition. My experience suggests that 30% of the time, the interest is mostly a fishing expedition and 95% of the time no LOI is reached. Let’s explore further.
Let’s start with the acquirer’s perspective. If it’s a company you already have a close partnership with, they might already know a lot about your company (strategy, business model, key customers, high-level results, etc). But, in many cases, they only know what is on your website or elsewhere in the public domain. And it is fair for any seriously-interested acquirer to get enough information to decide on a proposed price tag and high-level deal terms. That information is packaged up in a document called a Letter of Intent (LOI).
The LOI is essentially a term sheet with high-level financial terms of the offer, and also some other key legal terms like escrow, and exclusivity period (also known as a “no shop” clause). There are debates as to how much detail to include in the LOI versus leaving for the final merger agreement negotiations. But that’s a topic for another article.
Now for your perspective. You have a balancing act. You need to share enough information to facilitate a hopefully lucrative LOI. But if the ultimate offer is unacceptable or doesn’t come to a positive negotiated conclusion, you’d rather not have detailed or sensitive company information floating outside your four walls. And the more competitive, or potentially competitive, the prospective acquirer is, the more guarded you might be during the pre-LOI phase.
After an LOI is successfully executed, an in-depth due diligence phase begins. That’s when the acquirer gets to crawl through every nook and cranny of your business.
During the pre-LOI phase, companies are typically comfortable sharing high-level summaries of business information including historical financial (P&L, balance sheet, expense budget), sales pipeline, sales forecast (maybe even a high-level P&L forecast), number of customers, renewal rates, number and locations of employees, and the like. In other words, information that helps the acquirer confirm desired operational synergies and also helps them perform their financial analysis to come up with a “price tag” to offer.
On the product side, you possibly want to be more strict about staying at the high level (product demos, programming languages used, development methodology and general technical architecture).
My use of the words “high level” is the key. And for some requests you might feel it’s OK to drift into mid level. Let’s use some examples.
- It’s generally OK to show the prospective acquirer your sales pipeline but only at aggregate amounts by stage, not the actual list of opportunities that are being worked.
- If you have a distribution channel, it is probably OK to reveal the amount of revenue you’ve gotten from each of your Top 10 partners, but I’m not easily convinced they also need the names of these 10 partners. The litmus test to use is this: do they need the information in order to assemble a reasonable LOI? In the case of the actual names of the channel partners I would usually say “no”. But that’s different than seeing how much of your business is concentrated with only a few customers or channel partners because it might lead to risk.
- On the product side, they surely get to see in-depth demos of your product, generally understand your architecture or hosted infrastructure and you might even give a glimpse into the key enhancements you expect to release in the next 3 months. But they don’t get to see a long-range roadmap, look at source code or do a source code scan to determine how much open source you use. That happens after you execute the LOI.
What if Their Requests Go Too Far?
Now let’s move on to a very common dilemma – the prospective acquirer asks for more information than you are comfortable sharing. How should you handle this situation? I recommend that in the first discussion or two in which the other company mentions they are interested in exploring an acquisition, you let them know two things. First, your company is extremely busy executing your growth strategy and that’s why the CEO alone has been interacting with them. Second, you want to be supportive of providing information to help them assess what an offer might look like but that you want to keep it to the information truly needed to assemble an LOI. You express your strong preference to leave true due diligence to later, after an LOI is executed. Tell them you’ll be extremely open with information during due diligence.
This recommended approach has a couple of benefits. First, it shows that you’re at least somewhat educated on the early phases of the “dance” that goes along with an acquisition. Second, it helps secure the fact (or at least the perception) that you aren’t selling the company but, instead, the prospective acquirer is interested in buying yours. This is extremely important for later negotiation balance of power and you will definitely want to read my related article titled “Are You Selling Your Company or is Someone Buying It?” to learn more about this.
If the prospective acquirer hits you with a specific request that you either don’t want to provide or truly don’t think is necessary, your response could be something like: “I’d rather not provide that level of detail at this time. How were you hoping to use that information at this phase in the process? Maybe there’s a subset of information or higher level information we could provide that would accomplish what you’re looking for.”
Some requests create a big administrative hassle in order to fulfill. In these cases you can usually just let them know this instead of suggesting you’d rather not reveal that level of detail at this time. But be careful with this one because you don’t want it to appear that you’re not keeping track of important information or don’t have good systems and processes in place. If you would have to ask one of your employees or middle managers to pull the data and the request would be fairly unusual, that can also be an excuse. After all, you don’t want your employees to know their company might be sold.
As I mentioned previously, the more the prospective acquirer is currently competitive with you (or could easily be if they wanted to), the more conservative stance you can take and the additional positioning you can put on the table before more specific requests come in. In other words, you can let them know that the competitive nature of your relationship causes you to take caution until an acceptable LOI is executed.
By the way, in competitive situations you might even be a little guarded during the initial phases of due diligence after the LOI is executed. Remember that an LOI is not a definitive agreement to acquire your company but rather a “good faith” agreement on behalf of both parties to continue the investigation. If the deal busts in the first couple of weeks of due diligence, how much information do you want your competitor to have about your company? You should push to focus on potential deal breaker items early in the process so that if a deal isn’t going to happen, you waste minimal time and reveal minimal information. But before the deal is closed you are going to need to reveal just about anything and everything that is requested by the acquirer.
The Scapegoat Technique
You can always use your investors or board members as an excuse. For example, “My investors want to make sure that I’m careful not to disclose too much information or get too distracted with this exploration until a verbal offer is made and a subsequent LOI is executed.” Notice my mention of “verbal offer”. You can use this to your advantage as well. After sharing some initial information but perhaps not enough for the acquirer to present a formal LOI, see if you can get a verbal offer or indication. It’s obviously not binding and the acquirer is possibly going to want to do this anyway before spending the time and money to draft up an official LOI. Use this step in the process to put a pause on the information sharing and to see what the acquirer is thinking.
Are Your Ready for Due Diligence?
One last thought. Most startups don’t prepare for the possibility of acquisition due diligence and, therefore, are caught unprepared to respond to all of the resulting requests. And the bigger the acquirer, the longer the list of requests. If your pre-LOI discussions seem to be moving in a positive direction, you better start getting ready for due diligence. Here is a starting point: Setting the Stage for a Future Acquisition Exit.