The Confidentiality Conundrum
“Can you sell my business without telling anyone it’s for sale?” is the question we’re frequently asked when meeting with potential clients. Owners of medium to large-sized private businesses are justifiably concerned about their ability to maintain a high level of confidentiality when considering selling their businesses.
This query is rooted in valid concerns, considering the nature of business where competitors, suppliers, customers, and even trusted associates could exploit your vulnerability once they learn of your intentions.
Imagine having an exclusive arrangement with a supplier who, if they became aware that you were contemplating selling your business, might be encouraged to transfer the supplier agreement to a competitor.
Concerned about the stability of their source of supply, your loyal customers could start exploring alternative options if they catch wind of your business being on the market. Key employees might become jittery about their job security and career prospects if the company’s sale becomes common knowledge. And, of course, competitors would just love to know that your business is for sale because then they would go after your customers, your exclusive suppliers, and your best employees.
Real-Life Consequences of a Breach
We have been involved in the sale of a business in which confidentiality was breached by an employee. A competitor went to the client’s largest customer and told the customer that the client was for sale and was having financial difficulty. The customer canceled an order that was worth approximately 50 percent of the client’s annual revenue.
Can you imagine what that did to the value of the business?
Fortunately, a meeting with the customer was quickly arranged in this case. The solvency of the business was proven, and the customer was convinced that if the business were ever sold (which it subsequently was), the new owner would continue to provide the same quality of product, the same timely deliveries, and the same great service.
Identifying the Sources of Confidentiality Breaches
Confidentiality breaches can occur from various quarters, and being aware of these sources is the first step in safeguarding your business’s secrets. The most common culprits include:
The Immediate Family of the Seller: While your family may have the best intentions, it’s crucial to emphasize the importance of keeping the sale confidential.
- Bankers: Those involved in financial transactions might inadvertently leak information.
- Trusted Friends: Sometimes, confidants can unintentionally let slip sensitive details.
- Employees and Confidants: Employees who feel the uncertainty of a sale might share information within their networks.
- Professional Advisers: Even your trusted lawyers, accountants, and other advisers could unintentionally compromise confidentiality.
Strategies to Maintain Confidentiality
Now that we’ve established the stakes, let’s delve into the methodology and strategies that can be employed to maintain utmost confidentiality during the sale of your high-revenue business.
Hire a Business Intermediary
Maintaining confidentiality is not a simple task when selling a high-revenue business. It is an involved, interlocking process that has to be methodically practiced.
The methodology that we believe is most successful in maintaining confidentiality is using a business intermediary, a lawyer, an accountant, or some other third party to act as a filter between the owner of the business and the prospective purchasers.
Crafting Discreet Marketing Materials
Your marketing materials are your first line of defense. Great care must be taken to ensure that they do not provide any clues to prospective buyers about the identity of your business. It’s crucial to de-identify all selling materials and documents until a buyer is adequately qualified to receive them. The process of revealing sensitive information should be gradual and controlled.
Another way to keep important business secrets safe from your competitors is to hide certain details in the information you share. It’s like covering up the names of customers or products with generic names like Customer 1, Customer 2, or Product X, Product Y. For contracts, you can also hide sensitive things like prices or employee names by making them black.
Doing this lets you share how well your business is doing and why it’s valuable without telling everyone your special secrets. But you have to be careful not to hide so much that people don’t understand what you’re offering. That’s why it’s important to get advice from experts who can help you find the right balance between sharing enough and keeping your secrets safe.
Qualifying Prospective Buyers
Ensuring that all prospective buyers are qualified to receive information about your business is pivotal to maintaining confidentiality. Your intermediary should play a central role in this process. Here are some key steps:
A critical first step when selling a company is to have any prospective buyer sign a confidentiality agreement. This legally binding document emphasizes the gravity of secrecy. Confidentiality Agreements (CAs) are sometimes perceived as having limited effectiveness within the industry. However, their efficacy greatly depends on the obligations outlined in the document, which each party must commit to upon signing.
A robust CA, one that not only mandates the company but also extends its reach to encompass the company’s employees and advisors on an individual basis, represents a solid foundation. When there are personal consequences for individuals, rather than merely at the company-wide level, people tend to exercise greater caution to prevent breaches of confidentiality. The CA should encompass several critical aspects, such as:
- Prohibiting communication with employees of the target company.
- Restricting discussions about any aspects of the transaction or the target company to individuals who have signed the CA.
- Preventing engagement in conversations with customers or suppliers regarding the matter.
Prospective buyers should provide a credible third-party reference, such as an accountant or banker, attesting to their financial capability to purchase the business. This helps weed out non-serious contenders.
Integrity and Reliability
Beyond financial qualifications, it’s essential to establish the integrity and reliability of the prospective buyer. What do the business owner and their intermediary know about the prospective buyer? Does the buyer inspire confidence or doubt?
In business, your reputation is super important. If people find out that your company can’t keep things secret, they won’t trust you when you want to sell your business. This not only stops you from getting good deals in the future but makes it hard for people in the finance world to want to work with you. They like to work with companies that do the right thing and are known for it.
Sometimes, it’s tough to trust other businesses to be fair when they’re selling a company, but having a good reputation should be a big motivation for most business owners.
In the intricate dance of selling a business, maintaining confidentiality is paramount. As the saying goes, “loose lips sink ships.” Your business’s value, reputation, and future success depend on your ability to guard its secrets. Engaging a skilled intermediary, crafting discreet marketing materials, and rigorously qualifying prospective buyers are all part of the comprehensive strategy to protect your business’s confidential information.
Remember, the sale of your business is a complex process, but the careful preservation of confidentiality will ultimately determine its success. The sooner you start planning, the more discreetly you can execute the sale. Confidentiality should be woven into your business exit strategy from the very beginning.
A business exit plan requires a team of professionals, including an accountant, a lawyer, and a wealth manager. Many business owners postpone exit planning because it can be difficult to put together all of the pieces of the puzzle. Robbinex can step in at any point to relieve the stress of planning.
Our process is designed to manage and minimize the risk of information leakage, and reduce the time that the company is on the market, further minimizing risk.
- Why is confidentiality such a big deal when selling my business?
Confidentiality is crucial because if information about your business sale gets out, it can harm your relationships with customers, suppliers, and employees. It might also give your competitors an advantage. Maintaining confidentiality helps protect your business’s value and reputation.
- How can I ensure that my business information stays confidential during the sale process?
To maintain confidentiality, you can use a confidentiality agreement (CA), redact sensitive details, and work with an experienced intermediary. These steps ensure that only qualified and trustworthy individuals get access to your confidential information.
- Can I share any information about my business during the sale process?
Yes, you can share information about your business, but it should be carefully controlled. You should strike a balance between providing enough information to attract potential buyers and safeguarding your intellectual property and sensitive data. Expert advice can help you navigate this balance.
- What happens if confidentiality is breached during the sale process?
If confidentiality is breached, it can harm your business’s reputation and its value. Potential buyers may lose trust, and it can impact future business deals. It’s crucial to have safeguards in place, but also to act swiftly and decisively to mitigate the damage if a breach occurs.
- How can maintaining confidentiality benefit me in the long run beyond the current business sale?
A strong reputation for confidentiality can open doors to future merger and acquisition (M&A) opportunities and attract trustworthy partners. In the finance community, ethical behavior and confidentiality are highly valued, making it easier to build relationships and secure deal