How To Maintain Confidentiality When Selling Your Business

by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

The Importance of Confidentiality in M&A

Why is confidentiality important in M&A?

Once the cat’s out of the bag about the sale of your business, it may be too late to control the narrative. Employees who learn about the sale indirectly may lose trust in the owners, customers could jump ship, and competitors may attempt to poach your employees and clients.

Is a confidentiality agreement enough?

A signed non-disclosure agreement (NDA), or confidentiality agreement, is critical in helping to prevent leaks. But there’s always the chance of sensitive information coming out, especially over the long term. Your NDA should be just one element of an overall confidentiality strategy. 

The Importance of Controlling the Narrative

Controlling and managing the disclosure process means you can frame the discussion in a positive light, minimize damage to your business, and retain the trust of your key people by being the first to tell them of your plans. Tell a cohesive, compelling story that aligns your interests with those of your employees and clients.

How To Maintain Confidentiality Before the Sale

• Prepare for the Sale: The more time you spend preparing your business for sale, the quicker it will sell, which minimizes the possibility of information leaks.
• Inform Employees: There’s a time in the life of every entrepreneur when it’s best to let go. Employees understand this. New ownership can often spell opportunity for a driven employee. 
• Draft an NDA: A signed non-disclosure agreement alone doesn’t guarantee confidentiality, but it’s a critical component. NDAs prevent leaks in most cases. 

How To Maintain Confidentiality After the Sale Starts

• Control what and when information is released.
  • Aggregate sensitive information and redact specifics, such as names.
  • Release information in phases.
  • Develop separate strategies for different categories of information.
  • Set up an electronic deal room that tracks who accesses information and provides you with controls, such as restricted downloading or printing.
  • Email information to create a document trail.
• Control who receives information about the sale.
  • Thoroughly screen all buyers before releasing any information. 
  • When handling highly sensitive or confidential information, use neutral third parties to protect yourself.
  • Limit information to select parties.
  • Use the attorney-client privilege to protect applicable information.
• Handle breaches immediately. 
  • In the event of a breach, immediately call the offending party and discuss how they can reverse any damage done. 
  • Discuss how to prevent similar leaks from happening again.

Introduction

The longer it takes to sell your business, the higher the probability of a confidentiality breach. 

Once the cat’s out of the bag and word of the sale leaks, it can be almost impossible to retake control of the narrative. Employees who learn about the sale indirectly may lose trust, customers could jump ship, and competitors may attempt to poach your employees and clients.

A signed non-disclosure agreement (NDA) is critical but should be supported by other precautions. In this article, I reveal over a dozen safeguards you can implement before and during the sales process to help keep the sale of your business a secret.

Why Confidentiality Is Important When Selling Your Business

Let’s explore strategies you can use for maintaining confidentiality throughout the M&A process.

How To Maintain Confidentiality Before the Sale 

Tip 1 – Control the Narrative of the Sale Throughout the M&A Process

Rumors and misinformation about your sale could have a detrimental effect on the sale process. That’s why it’s important that you control the narrative throughout. 

Controlling and managing disclosure means you can frame discussions in a positive light, allowing you to:

• Minimize the possibility of damage.
• Retain trust with your key people by being the first to tell them of your plans.
• Frame your story in a cohesive, compelling way that aligns your interests with your employees’s interests.

Tip 2 – Prepare for the Sale of Your Business in Advance 

The more time you spend preparing your business for sale, the faster your business will sell and the less possibility there is of leaks.

As the saying goes, “An ounce of prevention is worth a pound of cure.” You should ideally prepare years in advance of a sale to ensure a quick, problem-free transaction, preventing news from reaching the outside world and your competitors.

Tip 3 – Tell Employees You’re Selling

There are no hard-and-fast rules regarding when you should tell your employees about your plans to sell your business. We recommend telling employees about your plans either as early as possible or as late as possible. In addition, employees should be asked to sign confidentiality agreements or, if appropriate, non-solicitation agreements.

We recommend reading the following articles for additional tips:

• Informing & Retaining Employees When Selling a Business
• Alternatives to Non-Competes with Employees

When telling your employees, you can also frame the sale in such a way that it benefits them.

An Acquisition Is An Opportunity for Career Growth

Your employees understand there’s a time in the life of every entrepreneur when it’s best to let go. New ownership makes sense at key stages in the life cycle of many businesses and can often spell opportunity for a driven employee. Sometimes, the only way their career can grow is if the company grows. 

Many entrepreneurs reach a stage where they’re simply “milking the cow” with no thoughts of expansion. To ambitious employees, this can be demotivating, but new ownership can provide them with great new opportunities. 

New Avenues for Employee Advancement

If the buyer is larger, they may also provide a new growth pathway for employees. Imagine if 3M bought a $20 million company. Which would offer an ambitious employee more – a career at the $20 million company or a position in any one of the many divisions at 3M?

New ownership may also bring capital to the table, which could present another opportunity for superstar employees. In nearly all acquisitions, the buyer wants to grow the business post-closing and is willing to take significant risks to do so. This offers your best people opportunities – when talking to them, make sure they know it. 

Acquisitions Can Help Identify Problem Employees

On the other hand, some staff who are used to resting on their laurels may be nervous about the prospects of a new owner. Buyers often note that some employees seem to be barely working yet have been receiving full salaries and benefits. To be sure, most staff are honest and hard-working, but transitions can be a good moment to purge the business of underperformers.

If employees learn about the sale indirectly, they may grow anxious about their job security and look elsewhere. They might even feel betrayed and start to compete with your business. 

If you are still concerned that how your employees might react to the sale, you can also:

• Request that all employees sign a non-disclosure (confidentiality) agreement: All employees should sign non-disclosure agreements (NDAs) before you tell them of your plans. Check to make sure the agreements are transferable in the event of a sale.
• Consider asking key employees to sign a non-compete: Consider asking employees to sign a non-compete agreement, if these agreements are legal in your state. Sometimes employees threaten to leave when a business is sold, then open a competing business and attempt to steal customers. A non-compete can help prevent this. If you can’t obtain a non-compete, ask for an NDA and non-solicitation agreement, at a minimum. Also, make sure these agreements are transferable in the event of a sale.
• Consider asking employees to sign a non-solicitation agreement: Non-solicitation agreements differ from non-compete agreements in that they prohibit employees from actively soliciting your client base or other employees if they resign or are terminated. They can compete but cannot solicit your customers, clients, or employees. If a non-compete is illegal in your state in an employment context (e.g., California, North Dakota, Oklahoma, etc.), use a non-solicitation agreement instead. Also, make sure these agreements are transferable in the event of a sale.

Tip 4 – Draft a Non-Disclosure Agreement (NDA) 

In most cases, a leak is just a result of negligence, and the offending party isn’t intentionally harming the deal. They may simply have slipped and bragged to their friends. In any case, a signed NDA is the first step in keeping your information safe. 

The Purpose of an NDA

The real purpose of a confidentiality agreement, or NDA, is to remind parties of the risks that come with leaked information and prevent them. A well-drafted confidentiality agreement (CA) should be combined with additional measures. For highly sensitive information released to competitors, for example, it may be wise to enter into a separate agreement or a multi-part NDA that addresses the disclosure of that particular information.

Tip 5 – Refine and Rehearse Your Response

Refine: It would be best if you prepare for a confidentiality leak. You can plan several responses for use in the event a third party unexpectedly asks if you are selling the business. You can also role-play a variety of scenarios and how you can potentially react to each.

Rehearse: Once you have decided how to respond, practice your response with a spouse or other trusted family member. Rehearse your response, so you are prepared if a third party asks if you are selling your business. 

Track: Finally, be sure to ask where they heard the “rumor” so you can track it down and send the offending party a cease and desist letter (assuming they signed an NDA).

How To Maintain Confidentiality During the Sale 

Tip 1 – Control What and When Information Is Released

Controlling what and when information is released is foundational to maintaining confidentiality in M&A. Here are several strategies for controlling information released 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 as the sale progresses and as transaction milestones are reached, such as the 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 only be released at the tail end of due diligence or after a definitive agreement is executed.
• Use Different Strategies for Different Information: Highly sensitive information that may be subject to misappropriation by the buyer could be summarized and shared through neutral third parties or only shared in summary form with the buyer. Use extreme caution around unprotected trade secrets and other non-registered intellectual property (IPs), and consider not releasing this information until the sale is finalized.
• Set Up a Virtual Data Room (VDR): If you’re negotiating and conducting due diligence with multiple parties simultaneously, it may be wise to release all information through an electronic or virtual data/deal room. These tools track and record who accesses information when and provide you with controls, such as restricting downloads or printing.
• Create a Document Trail: In addition to tracking documents and changes, it’s important to have a record of discussions and informal agreements. Such backup is not necessary for a sale, but it can be a lifesaver in the case of potential litigation. Record meetings, share memos, and send follow-up emails as evidence of discussions. Since the evidentiary burden is on the seller in most confidentiality agreements, the more documentation you have, the more leverage you’ll have to reach a quick resolution in the event of a breach or if the opposing party weighs the merits of a lawsuit. 

A virtual data room (VDR) helps sellers keep track of all documents, controls access and sharing, and creates a fast and secure way to release confidential information.

Tip 2 – Control Who Receives Information on the Sale

If you’re releasing highly sensitive information, you can use the following strategies to limit who this information is released to.

Screen Buyers

Thoroughly screen all potential buyers before releasing any information. Buyers should be screened financially and direct competitors should be screened with extra due diligence before any sensitive information is made available. Verify how many acquisitions they’ve previously made and request to talk to several CEOs about the deals. If you encounter warning signs, slow down and dig deeper. 

In the case of private, wealthy individuals, request a credit report or hire a private investigator to perform a background check if any suspicions are raised. A staffing firm was once purchased by a private individual using embezzled trust funds, for example. While such cases are rare, if doubts are raised, trust your gut.

Release Highly Sensitive Information to Neutral Third Parties

In the case of extremely sensitive information, it’s possible to appoint third parties to review it and prepare a summary report for the buyer. In one large transaction we handled, for example, two customers accounted for 40% of the seller’s revenue. The buyer was concerned about the risks of high concentration, and the seller was unwilling to let them talk directly with the customer. We hired a third-party firm to perform customer surveys and present findings to the buyer. This allowed the seller to keep the customers anonymous while addressing the buyer’s concerns.

Limit Information to Select Parties

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 this, I recommend the third party also sign an NDA. The terms of the agreement may need to be modified, for example:

“Buyer agrees that select evaluation material will be provided only to Buyer’s outside advisors and that Buyer shall not disclose such information to Buyer’s employees in its marketing, research and development, technology, or finance departments.”

Use the Attorney-Client Privilege

Omit documents from the data room that are subject to attorney-client privilege, such as those that might be relevant to recent litigation. In other words, if you’re in the process of litigation, disclose documents related to the litigation only through your attorney. 

In the event of a successful transaction, the buyer may share a common interest with the seller if the buyer becomes a “successor defendant.” This privilege isn’t guaranteed, so it’s wise to limit the disclosure of any litigation-sensitive information to come exclusively through your attorney to retain the attorney-client privilege.

In the case of extremely sensitive information, appoint a third party to review it and prepare a summary report for the buyer.

Tip 3 – Take Extra Precautions When Negotiating with Competitors

Keeping the details of your business secure and confidential is critical at any time, especially when a competitor approaches you. Here are several strategies you can employ to protect yourself when selling your business to a competitor:

• Contact buyers based on increasing stages of risk.
• Prepare a custom or buyer-specific NDA.
• Thoroughly screen buyers.
• Release information in phases.
• Know what information to release and when.
• Mark or stamp documents “Confidential.”
• Appoint a neutral third party to facilitate due diligence.

We recommend reading the following articles for additional tips:

• M&A Guide | Selling Your Business to a Competitor

Tip 4 – Handle Breaches Immediately 

In the event of an information leak, take the following actions:

• Immediately call the offending party. Leaks in confidentiality rarely cause permanent damage. In most cases, a call to the leaker quickly reverses any harm done. When a breach isn’t clear, a call may serve to raise awareness of the issue, and in most cases, the story will quickly disappear.
• Assess their reaction and tone. Listen to their story before taking any drastic action. The other side will typically apologize and take steps to correct the action, such as firing the employee who initiated the breach or calling the customer to rebuild the narrative. 
• Send a short email to confirm your conversation and any actions they’ve agreed to take. This follow-up email creates a paper trail in the event you need to pursue litigation in the future.

Conclusion

Maintaining confidentiality is critical when selling your business, but an NDA is just one of many tools in a watertight confidentiality strategy. Maintaining confidentiality is critical when selling your business, but an NDA is just one of many tools in a watertight confidentiality strategy. 

Prepare fully to avoid stalling the sale, consider using a phased and specific information release strategy and neutral intermediaries, and carefully balance the need-to-know with rigorous buyer screening. Clear communication with your employees keeps them on your side, slows down the rumor mill, and reduces the chances of a leak, malicious or otherwise. 

Loose lips sink ships, but with my confidentiality strategies on hand, you can keep your sale afloat.