LMN, Inc. has grown over the past few years primarily as a subcontractor to much larger (PRIME) corporations. LMN utilizes a mix of domestic and off shore employees to maintain quality and minimize costs. Recently, large clients have been approaching LMN directly. LMN’s certifications as a small, minority owned-, and woman owned- business may have opened some doors, but it’s clearly their capacity to execute well that is attracting large projects.
Recently, one of the large corporations (PRIME) that has been consistently sending business LMN’s way has expressed an interest in acquiring LMN. The large corporation is particularly interested in how LMN’s offshore staffing is handled.
The Owner/President of LMN was inclined to answer the prime corporation’s questions openly and completely. She wanted to demonstrate appreciation for all of the projects that have been subcontracted to LMN. And she was concerned that if she isn’t forthcoming, the pipeline of projects from that major corporation will stop.
What would you do if you were the Owner/President of LMN?
The answer flows from where the Owner/President of LMN was/is headed before the possibility of being acquired came up.
If the Owner/President is tired, bored, or ready for a new challenge, she might view acquisition as a welcome exit strategy. However, if she has waited too long and is really tired, she may be way too inclined to reveal trade secrets. I know of situations like that where the owner of the subcontracted company said so much that the larger corporation didn’t need to acquire her company. They simply took the information, used it to make improvements to their approach, and left the former subcontractor “hanging in the breeze.”
If you would be inclined to sell in this situation, it pays to utilize advisors so you don’t share too much and inadvertently lower the perceived value of your business.
We helped one of our clients in that circumstance sell her shares to a few company executive(s) so she could get the money she wanted and the executives (new owners) would then negotiate with the larger corporation about possible acquisition (or not).
If LMN’s Owner/President has taken a longer term view, she may be excited about the fact that large accounts are now coming directly to LMN and be glad that LMN is less dependent on any one (or a few) PRIME corporation(s). If so, she would see that just because the larger corporation has expressed an interest in acquiring her company, she should still protect its trade secrets.
(Note: In some ways, having a high percentage of your business coming from one major corporation feels like a bad acquisition has already happened. The large corporation may not have paid you, but they do essentially own you.)
This is a peer-to-peer situation that calls for equal levels of disclosure, due diligence, and exploration of the pros/cons to closer affiliation. It is not the time to think of terms of “courting the major corporation.” The large corporation should be courting LMN. What is the benefit of affiliating? What is so wonderful about becoming part of the major corporation that beats owning your own business?
Why is the larger corporation interested in acquiring LMN? Or are they really interested in eliminating competition (since large clients are now going directly to LMN)?
We advised LMN’s Owner/President to explore the possibility of a joint venture and table the acquisition discussion for now. Joint ventures involve clear commitments, declared time frames, shared responsibility, etc. If the two entities can find a fair approach to work closely together to both benefit…why would an acquisition be necessary?