Maintaining Confidentiality

Controlling the flow of information is critical to ensuring confidentiality. Knowing when to address issues in your business, when to leverage other offers, and most importantly, when to keep your mouth shut have made and broken countless deals. Therefore, being able to maintain confidentiality is vital. 

Strategy 1: Control What and When Information is Released

Controlling the content and timing of when information is released is foundational to maintaining confidentiality. Here are several strategies for controlling what and when information is furnished to potential buyers:

  • Redact or Aggregate Information: Consider sharing highly sensitive information in summary form in which key information – such as customer or employee names – is redacted.
  • Release Information in Phases: Release information to buyers in phases as the sale progresses and as transaction milestones are achieved, such as completion of financial due diligence. At each milestone, request that the buyer sign off on its completion. For example, names of key customers or employees should be released only at the tail end of due diligence, or after a purchase agreement is negotiated and executed.
  • Develop Separate Strategies for Different Information: Highly sensitive information subject to misappropriation by the buyer could be summarized, shared with neutral third parties, or shared only in summary form with the buyer. Always exercise extreme caution in areas of unprotected trade secrets and other non-registered IP.
  • Set Up an Electronic Deal Room: If you are negotiating and conducting due diligence with multiple parties simultaneously, it may be wise to release all information through an electronic data room. This allows you to track who accesses information and exercise some control, such as limiting the ability of buyers to download or print information.
  • Email Information to Create a Document Trail: Email as much information as possible to create a document trail in the event litigation needs to be pursued. This documentation can provide you with enormous leverage in the event of threatened litigation, such as when the opposing parties weigh the potential merits of a case before initiating a lawsuit. Since the evidentiary burden is on the seller in most confidentiality agreements, the more documentation you have, the more leverage you have to reach a quick resolution in the event of a breach.
Controlling the content and timing of when information is released is foundational to maintaining confidentiality.

Strategy 2: Control Who Receives Information 

If you are releasing highly sensitive information, you can often limit who this information is released to. Here are several strategies for doing just that:

  • Screen Buyers: Thoroughly screen all buyers before releasing any information. All buyers should be screened financially, and direct competitors should be screened with extra diligence. Due diligence is a two-way street – you should verify your buyer’s financial position during due diligence before releasing sensitive information. Verify how many acquisitions they have previously made and request to talk to several CEOs of their past acquisitions. If you encounter warning signs, immediately slow down and dig deeper. In the case of private, supposedly “wealthy” individuals, request a credit report or hire a private investigator to perform a background check if suspicions are raised. In one case, I sold a staffing firm to a private, wealthy individual who stole the funds he used to purchase the business from a trust, of which he was the trustee. While such cases are rare, if doubts are raised, trust your gut and dig deeper.
  • Release Highly Sensitive Information to Neutral Third Parties: In the case of extremely sensitive information, it’s possible to appoint third parties to review the information and prepare a summary report to present to the seller. In one large transaction I handled, representing the seller, two customers accounted for 40% of the annual revenue. The buyer was concerned due to the risk associated with the high concentration of revenue, but the seller was unwilling to let the buyer talk directly with the customer. We hired a third-party firm to perform customer surveys and prepared a summary report to present to the buyer.
  • Limit Information to Select Parties: Alternatively, you can limit information to specific people or departments within the buyer’s organization, such as the buyer’s CPA, attorney, or CFO. When doing so, we recommend that the third party also sign a non-disclosure agreement. 
  • Use the Attorney-Client Privilege: Omit documents from the data room that are subject to the attorney-client privilege, such as those that might be relevant to recent litigation. In other words, if you’re in the process of litigation, be sure to disclose any documents pertinent to the litigation exclusively through your attorney. Note that in the event of a successful transaction, the buyer may share a common interest with the seller if the buyer becomes a “successor defendant.” But this privilege isn’t guaranteed, especially if the transaction is unsuccessful. Therefore, it’s wise to limit disclosure of any litigation-sensitive information exclusively through your attorney to retain the attorney-client privilege.

Strategy 3: Handle Breaches Immediately 

Leaks in confidentiality rarely cause permanent damage. In most cases, unintentionally loose lips cause a leak, and a quick phone call to the offending party quickly reverses the damage, if any.

In the event of a breach, immediately call the offending party. Assess their reaction to the news and their tone – listen to their story before taking any dramatic action. In most cases, the other side will apologize and immediately take steps to correct the action, such as firing the employee who initiated the breach or calling the customer to reconstruct the narrative of the story. 

When a breach isn’t clear, a phone call may serve to raise the other party’s awareness of the issue, and in most cases, the story will quickly disappear. Send an email to confirm your conversation and any actions they have agreed to take. This creates a paper trail in the event you need to pursue litigation in the future.