Przegląd Piekarski i Cukierniczy, September 2018
Probably the most common mistake made by owners is disclosing plans to sell the company. Admittedly, there is nothing wrong with talking about one’s plans. After all, the company had been prepared for sale for many months. Several investors interested in purchasing the bakery were found. The investors begin inspecting the production lines and accounting books. The emergence of rumours is accompanied by uncertainty among employees, most of whom begin nervously looking for work. Suppliers begin analysing their accounts with the bakery because they suspect that something bad is happening. Customers also feel concerned. Several of the best employees leave the bakery. Serious investors, in turn, feel uncomfortable because they had assumed that the owner would preserve secrecy, at least during the initial stage of the transaction. Ultimately, they withdraw from purchasing the company because of the difficulty of maintaining production continuity after several key employees have left.
This is probably the worst scenario imaginable. Selling a company is not like selling a house or a car. A company is a complex organism in which people work and whose services customers use. It is an entire network of emotions and mutual connections. Finally, it is a competitive advantage and a set of complicated financial settlements.
Revealing the secret of the company’s sale unleashes an avalanche of negative effects, the most painful of which is the loss of its market value. Investors who are seriously considering purchasing a company usually do not want this information disclosed before the sale. Moreover, among large restaurant, coffee-shop or hotel chains, information about a sale is often disclosed only after a transition period because of concern about a decline in sales associated with a good brand and stability. Apart from the loss of value, disclosed information about the sale of the company triggers many other highly negative phenomena. These include demoralisation among employees, uncertainty among customers, and anxiety among suppliers and business partners.
How should an advertisement for the sale of a bakery be placed without revealing the secret?
To find investors, advertisements for the sale of the bakery must be published. If we refrain from advertising and limit ourselves to behind-the-scenes meetings and contacts with investment banks, it will turn out that there are too few purchase offers to provide a good negotiating position in the sale of the company.
If there is only one large bakery in a city, the name of the city should not be given; the region should be used instead. The home address, email address and landline telephone number should not be used, because many competitors and employees know them. All details that might reveal the secret must be avoided. The configuration of an email account or telephone intended solely for the sale must not be entrusted to one’s employees or acquaintances.
How should interested parties be answered without disclosing the secret of the sale?
Various people will respond to an advertisement in the press or on the Internet. They will include competitors from the industry, all kinds of property brokers and insurance agents, and even entrepreneurs who themselves are considering selling their own companies. Telephone enquiries cannot be answered by the owner or a member of the owner’s family, because in a small community they are usually widely known.
To avoid accidentally revealing the secret, handling the advertisement should be entrusted to the consulting company that assisted in building the bakery’s value and is now preparing it for sale. Its task is not only to conceal the secret but also to screen prospective counterparties. Sooner or later, some confidential information must be passed on to investors. The problem is that not all of them are genuine investors. Consultants should therefore ask specific questions that will expose the intentions of people merely pretending to be interested.
Prospective buyers should be asked whether they have experience in running a company in the confectionery or bakery industry and whether they possess the appropriate qualifications and licences. Several verification questions concerning baking technology may be asked. They may be asked for the name of the investor’s company, if one exists. Consultants should behave in a manner similar to recruiters who recruit top-class specialists while keeping the identity of their client secret.
I assure you that such questions can only earn the respect of genuine investors. They will make it possible to identify genuine investors for the next stage of the sales process.
The next stage is a meeting with the bakery owner, at which point the company’s name is disclosed. Several fundamental issues must be settled at that meeting. The owner should specify what is being sold: the entire company or a separated part of it, whether real estate is to be included in the transaction, and so forth. The owner should state the selling price. It is a good tactic for the owner to indicate several of the company’s most important shortcomings. This serves to prepare the ground for the future negotiations that will close the company-sale transaction. A meeting with investors undoubtedly requires the owner to be well prepared.
During the meeting, investors should disclose what intentions they have for the company and its employees after the takeover. The conversation should take place in a relaxed atmosphere and focus on industry topics and methods of conducting business, so that the owner can learn who the prospective buyers are.
The investor’s letter of intent to purchase the company
If an investor decides to purchase the company, they present the owner with what is known as a letter of intent. It is not a binding legal document. It forms the basis for further discussions aimed at selling the company. The letter should contain the preliminary price proposed by the investors, the form of payment, the purchase structure, any exclusions and special conditions, and the approximate timeframe for the transaction. It is essential to establish unambiguously who represents the investors. Sometimes the letter of intent includes provisions concerning the course of the transition period shortly after the takeover. The letter may also contain a declaration of cooperation with the owner after the sale.
Presentation of the letter of intent is not the appropriate moment to negotiate the selling price or purchase terms. Nevertheless, the appearance of the purchase price proposed by the investors and the identification of the transaction representatives provide good ground for future negotiations. For this reason, some investors try to avoid making price declarations at the beginning of the purchasing process or change their representatives during the process.
Before signing the letter of intent, the owner may respond with a counterproposal. For example, they may propose a new selling price or exclusions in exchange for a change in the form of payment.
It is good practice to collect a deposit from buyers amounting to 10% of the proposed selling price in order to secure the transaction.
How should due diligence be conducted without revealing the secret?
After the preliminary talks and presentation of the letter of intent, the investors are given the opportunity to analyse the company in detail. They begin preparing due diligence—a detailed report on the company. Employees of the company being sold will undoubtedly also be involved in its preparation: IT specialists, accountants, HR staff, and sales and production managers. The owner should personally inform several key employees about the sale in individual meetings. At the same time, these individuals should receive a confidentiality clause and an addendum to their contracts requiring them to work for the company for the following dozen or so months in exchange for special additional remuneration. In most cases, such action should be agreed with the investors in advance.
How should employees be informed about the sale?
After the sale, the owner should inform employees about it at a joint meeting. Key employees who previously participated in preparing the due diligence and in the company-sale process should also speak during the meeting. The owner should introduce the new owner and demonstrate confidence in their knowledge and experience. The owner should also tell employees what plans the new owner has, whether the bakery faces a major reorganisation, and whether expansion of the company is planned.
Business partners and large wholesale customers should similarly be informed directly about the sale of the bakery.
Preserving the secrecy of the sale is an important condition for a successful transaction. It shows investors that discipline and intangible assets that must be protected exist within the company. The letter of intent, in turn, is an excellent method of defining the negotiation framework that will be invaluable in the subsequent negotiation process. The worst solution is to leave information about the company’s sale uncontrolled. It is then difficult to predict what the consequences will be.
Wojciech Moszczyński