Confidentiality – Essential to The Sale of Your Business

If you are thinking about selling your business, then the importance of maintaining confidentiality cannot be overstated.  Along with proper valuation and preparation, discretion on the part of the seller and its team is paramount to a successful transaction.  Simply stated, a breach of confidentiality can result in many unwanted outcomes including employee anxiety, management exodus, and erosion of customer loyalty – all negatively affecting the marketability of the firm and the ultimate maximum value transaction that is desired.  Selling a business is not like selling a car or a piece of real estate – we cannot simply put an ad in the newspaper or a listing on MLS.

As Achim Neumann, President of A Neumann & Associates, LLC. and one of the foremost respected M&A advisors on the east coast, says in his 2017 book entitled The Road Beyond – What Nobody Tells You About Selling A Midsized Business, “Public knowledge that a business owner wants to sell will be bad news for the competitive position of the company.  Competitors will unquestionably exploit such uncertainty – competitors nearly always find out about direct negotiations if not handled properly.  A similar situation results when the employees or suppliers become aware that the business is on the market.  The seller loses leverage with both groups and reduces the goodwill value of the transaction.”

So, what can be done to avoid such an unwanted scenario?  A successful sale of the business can indeed be achieved in a discreet and professional manner – with complete respect for all involved.  Here are the 5 basic components to maintaining confidentiality before and during a sale of the business:

1. Tight Circle – Many business owners consider the company a “family”, and it most certainly is – a cherished team of managers, employees, suppliers, customers, and actual family members who all look towards ownership for stability and continuity. When it comes time for an exit strategy, the first impulse sometimes is to notify various team members and bring them into the process.  The exact opposite approach is needed.  Quite simply, the circle of people who are aware of your potential intentions should be as tight and limited as possible.  Gossip is a fact of life and anxiety can spread quickly – the less people who are aware of your intentions and involved in the process, the better.

2. Professional Team – It is imperative to have a qualified and experienced team of professionals in your corner as you research, prepare for, and ultimately execute a sale. This team usually consists of your CPA, a trusted business attorney as well as an experienced business broker or M&A advisor who should work together with you in the process.  This seasoned team will ensure that all steps are being taken to maintain confidentiality at every step.  One thing is for sure – if a business owner attempts to do everything himself, the word will get out and the sale will be undermined.

3. Proper Marketing Documents – A professional broker/advisor will formulate a thorough yet non-disclosing marketing campaign that will get the buyers attention without disclosing the identity of the business for sale. This is a key element of the process and must include the seller’s certification of the Blind Profile which is being marketed.  Purchasers often request more information than they are entitled to see immediately and will certainly do so without a qualified advisor facilitating the process.  The Blind Profile and all non-disclosing advertising language are an essential step in bringing the buyer and seller together without compromising confidentiality.

4. Strict Buyer Qualification – When a potential investor responds to a marketed business, it is imperative that they be subject to a stringent buyer qualification process that will include a full managerial background, financial disclosure, and well-written confidentiality agreement (often referred to as an NDA). This must be done consistently by your M&A advisor to ensure that you are only dealing with qualified and serious buyers who will honor the confidentiality requirements.

5. Discreet Communication – Finally, it is critical from the onset to be extremely diligent in the methods of communication. Personal emails, personal cell phones, off-site meetings, off-hours site visits, and a professional intermediary to coordinate all buyer/seller interaction in a discreet manner is essential to getting to the finish line and avoiding the negative consequences outlined previously.

As Mr. Neumann adds, “Transactions in small to midsized businesses must be kept confidential.  The circle of employees in the need-to-know realm should be limited to an absolute minimum of the most trusted people, if any at all.  Advertisements, buyer inquiries, and outreach to previous investors can all be handled in a fashion that conceals the seller’s identity or the location of the business.  Skillful buyer qualification and deft communication channels are essential elements of this process.  A breach of confidentiality along any of these lines will certainly lead to a significantly vulnerable and worse negotiation position for the seller.  By utilizing the proper team and a professional M&A advisor, the seller can protect his or her intentions until the very last moment and fully preserve the confidentiality of the contemplated transaction.”

Preparing for and deciding to sell a family or privately held business is a weighty exercise that calls for a thoughtful approach.  The execution of an efficient sale is a complicated process that calls for experience, discretion, and professionalism.  This is only going to be done once – it needs to be done correctly and with full confidentiality.

If handled with a small circle of family and professional teammembers, the business owner can indeed complete a maximum value sale without spooking employees, jeopardizing customers, alerting competitors, and undermining the attractiveness of the company.  Maintaining strict confidentiality through the elements described here is central to that success.