Confidentiality

When it comes time to sell your business one thing that you as a seller will have to do is divulge information that is highly confidential and imperative to the success of the business. Obviously, this type of information in the wrong hands can be seriously detrimental to your operations moving forward, particularly in the tightly knit business communities we serve (Pennsylvania, Connecticut etc.).

The way to ensure that your company is protected is to execute a Non Disclosure Agreement (NDA), which binds the party receiving the information to keeping all data confidential and not sharing with anyone outside of his or her operation. Still, even an executed NDA can leave you somewhat exposed, therefore other measures are necessary to protect your business. Below are some of the aspects of confidentiality sellers should be cognizant of when selling their businesses.

  • While the NDA certainly adds a layer of protection under the law they are not foolproof. There is still a chance that the data will be shared outside of the parties under the agreement. This is particularly true in large organizations where a number of executives and advisors may be involved in the transaction. While the NDA is certainly enforceable, data shared with outside parties happens and there is no way to undo it. For this reason, experienced business brokers and investment bankers only share highly confidential data with buyers once they have submitted a letter of intent for the business and possibly only after the buyers have met certain transaction milestones. This shows a serious level of interest and a commitment to moving the process forward.  Each situation is different and requires a thoughtful process to protect your key information.
  • Auctions, while a strong and successful way to market a business, can make keeping confidentiality more challenging. The idea behind the auction process is to market the business to as many qualified buyers as possible to generate multiple offers and hopefully sell to the highest bidder. The issue that can creep up in these instances is that the more parties involved means the more data that is shared. This is a situation that needs to be discussed with your investment banker or business broker. Most qualified buyers would never chance violating and NDA because they buy companies for a living and would not want to tarnish their reputations. However, if the best buyer is a strategic competitor you should consider a way to parse out limited data until you have relative certainty that they will be the eventual buyer.
  • Do not share that the business is being marketed for sale with anyone that does not absolutely need to know. Meaning, employees talk and rumors spread quickly. Generally it is best not to let your employees know the business is for sale until after the transaction is complete. However there are times when certain key people, such as your CFO, may need to be included to assist with the details of due diligence.  When in doubt, consult with your advisors before including key management team members in the sale process.
  • Not everyone who may have an interest in your business should be given confidential information.  Beyond the signing of a Non Disclosure Agreement, buyers should be screened to determine their backgrounds, motivations for a deal and financial ability.  There is no point in exposing your business information to buyers who are either not qualified or not someone you would want to deal with.
  • Be cautious, but there is no need to worry yourself sick over the issue of confidentiality. The truth of the matter is that if you hire a reputable investment banker or business broker to represent you in the sale of your business they will work to ensure that confidentiality is maintained. Confidentiality issues are rarely of importance when you are dealing with professionals, it is just something to keep in mind as you go through the process of selling your business.

Understanding your potential exposure and having a realistic expectation of what confidentiality really is in the context of the sale process will better prepare you for a successful business sale.