Should You Include Executives and Management in the Deal Process?
- When to communicate a potential sale or capital raise to the C-suite or middle management
- How to get the necessary support from key team members
When considering a prospective exit or capital raise, you’ll need to think about who should be involved in the process.
The input of your executive and management team will be essential to the diligence process, but timing is important. You want to be thoughtful about the right time to bring the broader group under the tent.
Risks of Early Disclosure
The biggest reason you want to be thoughtful about the timing of broad disclosure is to prevent unnecessary anxiety until the transaction is firmed up.
This insight is intuitive to most founders, who are naturally hesitant about disclosing a potential transaction to management or other employees. Founders worry that once their team learns of a possible deal, they risk attrition, communication breakdown, or even decision-making paralysis as personnel think about how a transaction could impact their future.
But there are good reasons to appropriately include management in the process.
First and foremost, a buyer or investor should have access to the team that makes the magic happen. Ultimately, the buyer is investing in that team’s expertise and ability to deliver value, so developing relationships will be important—particularly if the founder intends to exit the business or take a back seat going forward.
Looping in management is also important for streamlining the diligence process. In almost all cases, founders are not in a position to provide all data buyers/investors will need to evaluate the business. As such, looping in key management in a thoughtful manner means you will have timely access to data and the support you need to close a deal.
So given the tradeoffs between minimizing deal anxiety and involving more members of your team, what’s your best approach? When and whom you bring into the fold will depend on three main items:
- Transaction lifecycle
- Deal structure
- Ownership interest
As mentioned, good companies are made up of good teams, with each member specializing in their respective areas. So not only will the various members of management be helpful in providing access to data, but even more importantly, they will be great resources to appropriately explain and position that data in the context of the business/market.
But not everyone needs to be involved right at the beginning. Whom to involve in a transaction depends on how far along you are in the process.
Generally speaking, you’ll start with a narrow scope, limiting communication to key executives. As you move from pre-deal preparation to due diligence to marketing to closing, you will expand the group (finance, technology, business development) that is involved as your need for support grows. If there are multiple buyers, expect to pull in leaders across every functional area for a deep dive.
During the final phases, you’ll include anyone key to your company’s success so you can best market your business.
Note, however, that except for key employees, news of any pending deal should not be shared widely until the transaction is complete. Avoid making company-wide announcements until the deal is signed. Unless it’s finalized, there are always risks. It’s best to hold off until there’s certainty.
Generally speaking, the more control you expect to turn over in a transaction, the more thoughtful you should be about whom to involve. That’s because a minority deal vs. a majority recap vs. an outright sale will have different implications for your team.
With a minority investment, the strategy, operations, and personnel are unlikely to change. There is greater incentive to bring in your executive and management teams earlier in the process to help put together materials and build confidence in the business.
A majority recap, however, gives a potential investor more control of your business. Consider bringing in only the CEO, CFO, or other members of the C-suite in the initial stages of the transaction. As the transaction timeline progresses, you can expand who gets involved in the process.
If you are considering fully exiting from your business after a transition period, it’s important that buyers get access to the key players in your company’s success. Those key executives and individuals should play an active role in the transaction lifecycle to build confidence in the business.
This said, transactions can be a huge distraction regardless of what path you pursue. As such, the various team members should only be brought in when needed so they can focus on executing their day-to-day roles. Consequently, access should always be limited and provided at appropriate times in a process. A banker can help you determine when those points are necessary.
Many of the founders we represent have a nearly full ownership interest in their company. But there are instances where another shareholder holds a significant stake in the company. If you have large shareholders with 10% or greater ownership in the company, consider incorporating them earlier in the process in order to avoid any last minute issues or objections.
Prepare for a Transaction
As with other aspects of running a transaction, knowing whom to involve in a process and how is a sensitive issue that needs to be handled with care.
Hiring an investment bank can help you make the right moves at the right time.