Is Confidentiality Even Relevant in Selling a Business?

Transactions in small to mid-sized businesses must be kept confidential. In particular, every effort must be undertaken to keep a pending sale unknown to competitors.  But even the circle of employees in the need-to-know realm should be limited to an absolute minimum of the most trusted team members, if any at all.

So why is confidentiality so important?

The knowledge about a pending business sale has an impact on vendors, employees, banks, landlords and most importantly, customers. Generally, no individual likes change – the fear of the ‘unknown’. In the case of a business sale, however, this can have a significant negative economic impact.

Specifically, vendors will be concerned about receiving payments, employees fear lay-offs, and banks are concerned about the servicing of loans. Most importantly, customers will start to invite competitors to bid on their business in order to secure product/service sourcing in the future. Worse yet, the longer the time span between a breach of confidentiality and a deal closing, the worse the impact will be from any one of the stakeholders above – with a direct impact on the performance of the business and deal value.

Thus, one key objective of the marketing documents—in particular, the blind profile, is to maintain confidentiality with respect to the sale of the business, preventing stakeholders from learning about the sale.

“Many years ago, we were approached by a roofing company,” says Achim Neumann, President, A Neumann & Associates, LLC, a New Jersey based M&A advisory and business brokerage firm, “which served commercial customers, was unionized, and located in a particular state on the East Coast. It took us quite some effort in explaining that if we were to mention these four criteria, competitors might easily be able to identify the business through the simplest investigation.”

Thus, an inexperienced advisor – often so-called ‘industry specialists’ – would clearly have lacked the experience in this example to write a blind profile without essentially divulging the identity of the company. Such ‘experts’ are simply lacking comprehensive confidentiality procedures to prequalify a broad segment of investors properly.

Even after a deal has been agreed upon with an investor, it is important that the confidentiality is fully warranted during the due diligence phase. We have advised many business sellers that all negotiation leverage will be lost once confidentiality is breached, leaving the seller in a very vulnerable position. With approximately 25 percent of all initiated deals not completed for one reason or another, sellers most certainly would not want to have customers, vendors, or employees knowing about the business being for sale.

In conclusion, confidentiality must be maintained all the way until checks have changed hands at the closing table – sometimes even beyond that.