When it comes to selling your business, time is fickle. It’s your friend before your business is on the market and your enemy once your business is on the market.
The longer it takes to sell your business, the higher the probability of a leak.
Why is that a bad thing?
Once the cat is out of the bag and word of the sale does leak, the narrative may become distorted and impossible to control. Employees who learn about the sale through indirect means become distrustful. Customers may jump ship, and competitors may attempt to poach your employees and customer base.
Doesn’t a non-disclosure agreement (NDA) ensure confidentiality?
A signed non-disclosure agreement alone does not assure confidentiality, but it is a critical component. NDAs do prevent leaks in most cases. However, the longer it takes to consummate a transaction, the higher the probability of a leak.
The real purpose of a confidentiality agreement is prevention, but it is not the only tool you should use. A well-drafted confidentiality agreement should be combined with additional actions for maintaining confidentiality.
In this article, we reveal over a dozen strategies you can implement both before and during the sales process to help keep the sale of your business a secret.
Table of Contents
- Reasons for Maintaining Confidentiality
- Strategies to Implement Before the Sale
- Prepare for the sale in advance
- Control the narrative
- Inform employees
- Draft a non-disclosure agreement
- Strategies to Employ During the Sale
- Control what and when information is released
- Control who the information is released to
- Handle breaches immediately
Reasons for Maintaining Confidentiality
There are three primary reasons for maintaining confidentiality:
- Employees: If employees learn about the sale, they may become nervous regarding their job security. As a result, they could begin to look for employment elsewhere. In other cases, employees can feel betrayed by the owner and could form a small coalition to compete directly with the owner.
- Customers: Both existing and potential new customers may learn of the possible sale and become nervous that a new owner will substantially change the business model or increase pricing, so they may begin looking for alternative solutions through competitors.
- Competitors: Competitors may use knowledge of the sale to poach both employees and customers of the company.
Let’s explore strategies you can use for maintaining confidentiality.
Strategies to Implement Before the Sale
PREPARE for the Sale in Advance
The longer it takes to sell your business, the higher the probability of a leak. The more time you spend preparing your business for sale in advance, the more quickly your business will sell, which minimizes the possibility of a leak.
An ounce of prevention is worth a pound of cure, and selling your business is no different. To preserve confidentiality, you should ideally prepare for the sale years in advance, which helps ensure a quick, problem-free transaction, thereby minimizing the possibility of a leak and its consequential damage.
Control the NARRATIVE
As anyone who has played the “telephone game” as a child knows, rumors can quickly mutate, and once they become viral, the narrative can become impossible to control. Rumors are like a bell — you can’t unring them.
Controlling and managing the disclosure process puts you in a position to frame the discussion in a positive light, which allows you to:
- Minimize the possibility of damage.
- Retain trust in your key people by being the first to tell them of your plans.
- Frame your story in a cohesive, compelling fashion that aligns your interests with those of your employees.
Once the cat is out of the bag and word of the sale does leak, the narrative may become distorted and impossible to control. Employees who learn about the sale through indirect means become distrustful. Rebuilding trust with your employees can take years. And, unfortunately, if you are in the process of selling your business, you don’t have the liberty of time to rebuild trust with your employees. Therefore, you are at a great disadvantage for the remainder of the sale process because you have lost trust with your team and lost the ability to use your team as an asset to building trust with the buyer. Buyers become nervous when there’s a lack of trust between owners and the employees, and this has caused many deals to derail or outright fail.
Employees understand that there is a time in the life of every entrepreneur when it’s time to let go. New ownership makes sense at key stages in the life cycle of many businesses, which often spells opportunity for a driven employee. In most cases, the only way an employee’s career can grow is if the business grows. Most entrepreneurs reach a stage where they are “milking the cow” and no longer have the desire to grow the business, limiting employees’ growth. To ambitious employees, this can be demotivating. New ownership can provide these employees with new opportunities that don’t exist under current ownership.
Employees resting on their laurels may be understandably nervous about the prospects of a new owner. In many cases, buyers have told us that they found some employees seemed to be barely working in the business yet were receiving full salary and benefits. A transition can be an excellent means of purging the business of “dead weight.” To be sure, the majority of employees are honest and hard-working, but there are bad apples in any bunch.
If the buyer is larger, a new owner may provide a pathway of growth for employees through opportunities outside the organization. Imagine if 3M bought a $20 million company. Which situation would offer an ambitious employee more opportunity? A career at the $20 million company or a position in any one of countless divisions at 3M? New ownership may also bring capital to the table to expand the business, which could represent another opportunity for superstar employees. In nearly all acquisitions, the buyer desires to significantly grow the business post-closing and is willing to take significant risks in doing so. This offers your best employees opportunities — make sure they understand the potential.
Draft a Non-Disclosure Agreement (NDA)
A signed non-disclosure agreement alone does not assure confidentiality, but it is a critical component. NDAs prevent leaks of confidentiality in most cases. However, the longer it takes to consummate a transaction, the higher the probability of a leak. In most cases, a leak is negligent, and the offending party is not intentionally harming your business. Instead, they may simply have slipped and bragged to their friends.
The real purpose of a confidentiality agreement is prevention, but it is not the only tool you should use. A well-drafted confidentiality agreement should be combined with additional actions for maintaining confidentiality. As an example, for highly sensitive information released to competitors, it may be wise to enter into a separate agreement or a multi-part NDA that addresses the disclosure of that information.
Strategies to Employ During the Sale
Control WHAT and WHEN Information Is Released
Controlling what and 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 only be released at the tail end of due diligence, or after a definitive agreement is negotiated and executed.
- Develop Separate Strategies for Different Categories of Information: Highly sensitive information subject to misappropriation by the buyer could be summarized, shared with neutral third parties, or only shared in summary form with the buyer. You should exhibit 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, which tracks who accesses information and provides you with controls, 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 will have to reach a quick resolution in the event of a breach.
Control WHO Information is Released To
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, we 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 we 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. However, the terms of the agreement may need to be modified.
- “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 are 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.” However, this privilege is not guaranteed, especially if the transaction is unsuccessful. It’s therefore wise to limit disclosure of any litigation-sensitive information exclusively through your attorney to retain the attorney-client privilege.
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 a short 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.
Maintaining confidentiality is a critical component of selling your business. A confidentiality agreement is one of many strategies to preserve confidentiality. A well-drafted confidentiality agreement should be paired with the strategies recommended above to ensure confidentiality is maintained throughout the sales process.