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Be Cautious in Disclosing Buyout Offer

January 28, 2002

Executive Roundtable is a weekly column by TEC Worldwide, an international organization of more than 7,000 business owners, company presidents and chief executives. TEC members meet in small peer groups to share their business experiences and help one another solve problems in a round-table session. The following question and answer is a summary of a discussion at a recent TEC meeting in Southern California.

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Question: I recently received an unsolicited offer to buy my business (nothing in writing yet, just a verbal offer), and I can't decide whether to tell my management team.

We suffered a sharp downturn in sales this year, and after six months of hard work we have finally gotten the company back on track. I'm afraid that if I say anything, my managers will lose their focus and some might even think about jumping ship. On the other hand, I've always been open with my team, and it feels like I'm holding out on them.

Should I disclose the news now or wait until I have a done deal? My most senior manager has a 5% ownership stake in the business.

Answer: To disclose or not to disclose, that is the question. However, though your concern for your management team is both appropriate and commendable, it is only one of many issues that need to be addressed before making any decisions.

First and foremost, suggests Suzanne Frindt, a principal in the consulting firm of 2130 Partners in Villa Park, step back and take a look at the big picture.

Does selling the business now fit in with your long-term goals and objectives for yourself and for the business? Are you ready to retire? Have you considered the financial and tax implications of a sudden cash windfall? Do you know what you want to do with your life after you cash out?

From a business standpoint, do you know the true value of your business--not what you think it is worth but what the market says it is worth? More important, what might it be worth five or 10 years down the road?

Although the offer looks attractive now, you may get a better return by growing the company a few more years and then cashing out when earnings reach a higher level and the balance sheet looks stronger.

Finally, exiting a business should be a carefully planned and executed process. Responding to an unsolicited offer puts you in a reactive rather than a proactive mode. It puts someone else in control of the process, which reduces your odds of getting the best return for your most valuable asset.

This doesn't mean you shouldn't listen to the offer. However, in these situations it pays to proceed slowly and cautiously.

If you decide to move forward with the sale, the issue of when and what to tell your management team comes to the forefront. Jo Hunt, president of DeLyon-Hunt & Associates in Redondo Beach, recommends getting all your ducks in a row before broaching the subject with your team.

"At this point, you don't have anything concrete to tell your people other than that you're considering a verbal offer to buy the business," Hunt said.

"Surprising them with vague ideas about a deal that may or may not happen will only lead to speculation, rumors and uncertainty. And depending on who the potential buyer is, you may have serious confidentiality issues," she said. "It may feel uncomfortable keeping the news secret, but wait until you have some solid information, then let your people know the 'who, what, when, where and why' of the deal."

Carri Johnston, president of Pep Threads in Orange, agrees:

"Letting the cat out of the bag too soon could cause an adverse reaction in both directions. If your managers perceive the sale as a bad thing, they might get panicky and start looking for other jobs. Plus, rumors can spread and then you have your hands full with damage control.

"On the other hand," Johnston said, "your managers might see the sale as a good thing and then get disappointed if the deal falls through. Either way, the downsides of disclosing too soon far outweigh the upsides."

The last thing you want to do in this situation is attempt to go it alone. Wes Phillips, chief executive of Hunter Barth Advertising in Costa Mesa, strongly suggests engaging the services of a professional advisor as soon as possible.

"Selling a business is a very complex undertaking that requires the advice of experienced professionals," Phillips said. "Before you take another step, find a reputable business broker or [mergers and acquisitions] specialist and let them guide you through the process.

"Even if you decide not to go forward with the sale, an advisor will help you ask the right questions and make sure you cover all the bases in your initial discussions with the potential buyer. Plus, a good advisor will clarify any legal ramifications that might exist with your minority shareholder.

"If you decide to move forward, I would share the news with your team as soon as you receive a formal letter of intent from the buyer," Phillips said. "To wait any longer may destroy the trust they have in you, and once broken, trust is very hard to get back."

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If there is a business issue you would like addressed in this column, contact TEC at (800) 274-2367, ext. 3177. To learn more about TEC, visit www.teconline.com.

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