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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

Douglas Baskett
Title: Consulting CFO
Company: SBA * Consulting
(Consulting CFO, SBA * Consulting) |

Although this question was asked several months ago and so I assume your process has advanced far beyond the initial stage, it is a question worth answering.

Especially is you have a private company, nothing substantive should be offered until you at least have a signed Letter of Intent (LOI) in hand. Kimonos should stay closed until you are you are strongly confident the engagement and marriage will take place, and even so restrictions will apply. I would advocate listening to the initial proposal and responding by saying that you will report it to your Board, and then hire an expert to offer advice or even guide you through the process.

The target company should not be forthcoming with the potential acquirer at the initial stages of inquiry and negotiation, especially if the potential acquirer is looking for a strategic versus a financial acquisition. It is prudent not to disclose anything substantive until considerably farther along in the process because the potential acquirer may not intend to follow through with the acquisition at all but is hoping instead to use the process to gain insight into your company's operation. This is a cynical view, but people sometimes act cynically.

Another outcome might be that enough proprietary information is inadvertently exposed that the acquirer unexpectedly has enough insight into the market to compete more effectively than before the exploration took place. Such an information windfall provides an incentive for the potential acquirer to back off from the deal.

There is a great deal more to be said about this and I don't want to be long-winded here, so I'll leave it at this, that the best approach is to be circumspect and protective of the asset that you and someone else seem to value.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

To add to Douglas' well written answer; have a fully developed Non-Disclosure in place prior to delving into any substantive talks.

If the potential opposite (buyer/seller) is not willing to sign; they aren't really interested.

Topic Expert
Sunil Thukral
Title: Controller/Technical Accounting Advisory..
Company: Consultant
(Controller/Technical Accounting Advisory/ SEC Reporting, Consultant) |

Here are some other comments on a different thread that might be useful....

https://www.proformative.com/questions/ma/answer/ive-had-potential-strategic-acquirer-approach-me-ask-lot-questions-about-our-0

Jake Kaldenbaugh
Title: Corporate Development
Company: CA Technologies, Inc.
(Corporate Development, CA Technologies, Inc.) |

The answer depends. As someone who works in a large company Corporate Development function, my job is seek out interesting acquisition opportunities for the organization to consider. In almost all of the conversations that I have with private companies and startups, I ask about financial performance and the composition of the cap table. Without this basic information, it's very difficult for me to take an idea to the executives who make the decision about whether they want to move forward with a deal. Often, their first questions when I present an idea are: How big is this company? How is their growth? Are they profitable? I can't answer that question without financial information.
These conversations happen significantly before we get to an LOI process. The other advice here saying "demand an LOI" are naive. Large companies need a substantial amount of information about a target before they spend internal resources and executive time on approving an LOI. Most LOI processes go to the highest levels of the organization and require finding time on extremely crowded calendars. And for large organizations, they may have several different deals under consideration at any one point in time.
With regards to non-disclosures, we typically don't sign them to find out basic information on a company to make a decision if we want to spend additional time on it. NDAs typically have a number of additional terms (non-solicit, etc...) that we are not willing to accept in order to simply find out how much a company has in terms of revenues or whether its profitable.
So part of this is an assessment of whether you want to make yourself "marketable" to a larger company, whether you think they are serious, an understanding that they often have complex, consensual processes and if you think it's wise to pass up their offer for a discussion. Depending on your assessment of those factors, you should decide how much to disclose in any conversation.

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