When you begin the process of selling your business, there are obviously a lot of factors that you will need to consider. One factor is maintaining confidentiality when selling your business. You might be wondering how it is possible to keep this sale confidential since selling a business requires you to advertise it for sale to the public. You might also be wondering why it matters to maintain confidentiality during this process in the first place. Here we will address these concerns and explain the importance of confidentiality during the sales process.
Importance of Confidentiality
When you go to sell your business, the business itself continues to function as always. This means you’re still dealing with the day-to-day operations involved in the business and dealing with the various stakeholders, such as the employees, customers, vendors, and creditors. Although your mind might be focused almost completely on the sale of your business, you still must worry about managing your business too and making sure its productivity remains efficient.
If it is announced to your stakeholders that your business is up for sale, it can jeopardize the momentum of your organization’s productivity. You’ll find that customers and clients will feel uncomfortable doing business with you because your company is about to be sold to someone else which whom they don’t even know. You may have established trust with your clients because they got to know you as the owner of the business. But, they might not necessarily like the next owner of your business and how they manage it. This is where they become nervous and may look for another business to deal with.
The employees of your business are also going to become nervous if the company is up for sale. Often times, when a business changes ownership, there are a lot of layoffs and position changes within the organization. This makes employees feel like their job security is in jeopardy and that will create a lot of negative emotions in the workplace. They may even start looking for another job if they feel their current job is at risk. This will, in turn, have a negative effect on the productivity of the organization. After all, happy employees mean high productivity, but the opposite is true too.
Vendors are the businesses that your company does business with. Perhaps your company depends on purchasing supplies from a vendor in order to fill its inventory. Well, if your vendors were to find out that you’re selling your business, it could make them nervous about its financial stability. They may worry that you won’t have enough money to pay them and this could cause them to stop doing business with your company altogether. That is why it is better that they don’t learn about the sale while it is taking place.
The potential buyers of your business won’t like that you’re announcing the sale either because they’ll want to remain discreet about it too. Since buyers often must give business owners very sensitive information about themselves, they don’t want this information to be passed around within the organization. If they hear that you’ve announced the sale to everyone, they might want to walk away before closing the deal.
You don’t want there to be too much gossip about your business being for sale. All it takes is for a few people to hear about it within the organization, and then they’ll spread the word around to other people they know. Pretty soon, your competitors will hear about the sale and will begin to plan their own strategies accordingly. Then, the value of your business will drop as more people begin to learn about it being for sale. They’ll figure that the business must be in trouble if the owner wants to sell it. This reduces the level of trust from the public and it makes fewer people want to do business with you.
Meanwhile, your competitors will move in and scoop up all these nervous customers that you once had. Therefore, maintaining confidentiality is crucial throughout the entire selling process of your business. This will ensure that your day-to-day operations do not change the value or productivity of your business.
How to Deal with Confidentiality Issues
When it comes to maintaining the confidentiality of the sale of your business, you must worry about keeping this information from customers, vendors, employees, and competitors. If just one of them finds out, the word will spread quickly and then soon everybody will know. There is no full proof way of preventing people from knowing about the sale, but there are certain key strategies that you can implement to reduce the chances of people from finding out.
The hardest part of maintaining confidentiality is the risk of stakeholders coming across the advertisements which list your business for sale. One strategy to work around this is to create what is called "blind advertisements". These kinds of advertisements basically use generic information in the listing and do not reveal anything sensitive about your company, like its name or address. If you need to list an address or some type of contact information, just use your business broker's email address, or PO Box. The only information you should have in a blind advertisement is the type of business, the size of the business, the value and strength of the business, and your asking price.
Qualifying the Buyer
Qualified means the buyer has the financial means to purchase your business and is not just some random person making an inquiry. After all, if you’re going to take on the risk of revealing your company’s sensitive information to them, you’ll want to make sure they are at least a reputable buyer. This involves performing a background check and credit check on them just to ensure they are a responsible person. Most importantly, they’ll have to prove that they have the financial means to purchase your business (whether it is a cash sale or a financing sale). If it is financing, then the credit check is even more essential.
Related: How to Qualify Prospective Buyers
Confidentiality and Non-Disclosure Agreement
Once the buyer is qualified, you should then have a legal professional create a Non-Disclosure Agreement (NDA) and have it emailed or faxed to the buyer, so they can sign it. This will help ensure that your buyer keeps information about your company and its sale confidential. It will also reduce the chances of gossip from spreading about the sale. That is why you don’t want to list too much revealing information in your advertisements. Just give potential buyers a little bit of information about the background of your business and its value. Don’t mention anything about your organization’s strategies or how it continues to thrive. Otherwise, the buyer may take your information and then start their own new company with it.
An NDA won’t guarantee anything, but it will certainly reduce the risk of a potential buyer talking about your business to anyone else. If they do talk about it and breach the contract, then you have the legal right to sue them. Plus, their reputation will also be destroyed too, and no business owner will ever trust them again. So, they likely aren’t going to risk that.
Create an Inquiry System
Statistics show that 90% of ad responses are from buyers who are not qualified. It would be a waste of time and resources to simply try and qualify every person that simply inquiries about your business sale. What you need to do is basically separate the serious buyers from the non-serious buyers, while not revealing any sensitive information about your business that will give away the identity of your company. The best way to handle this is by creating an inquiry system.
An inquiry system is a system where you gradually release small amounts of information to a buyer as you qualify them and get a sense of their seriousness in purchasing your company. For example, when someone initially responds to your blind advertisement, you need to question this potential buyer about their qualifications, experience with running businesses, and their intentions for running your business (without identifying your business). If they give positive answers and it looks like they could be a good buyer, then you can check to see if they’re a qualified buyer.
After you’ve qualified a buyer and gotten them to sign an NDA, this doesn’t mean that you should give them all the information about your company right away. You’ll still want to give them small amounts of information while still not revealing too much sensitive information. This communication exchange will continue to be through email, phone, and paper letters. If the buyer continues to remain interested and you feel like they could be a serious buyer, then you can arrange to meet them in person.
When you arrange the in-person meeting, don’t have them come to your place of business because that will reveal its identity. A good place to meet would be in the office of a business broker, attorney, or accountant. Here you will reconfirm their interest in purchasing your company. If it is reconfirmed, you will then have your attorney form a mutual confidentiality agreement which both parties sign. This is a much stricter non-disclosure agreement that outlines specific areas of information that cannot be disclosed.
Once the mutual confidentiality agreement is signed, have the buyer sign a letter of intent form as well. This is a letter where the buyer officially confirms their intention to purchase your business and to remain confidential about its records. If there is ever a disclosure problem later on with the buyer, the letter of intent will give you a bigger legal standing in court. After the buyer signs the letter, they will begin their due diligence process. This is the time when you can reveal your company’s financial records and the overall process of its operations to them.
Video: David C Barnett explains the key confidentiality issues when selling a business
Handling Your Employees
As the sale of your business progresses and it looks like a sale is imminent, your employees might suspect that something is going on. The only employees who should know about the sale are your management team. They’re going to have to know at some point because they’re the ones managing your business for you. As for the lower-level employees, they don’t need to know anything until after the sale happens and the new owner has already taken control of the company.
During the selling process, the employees are likely going to see you walking throughout the building and showing some stranger around (who is really the buyer). As the gossip starts to pick up at this point, you should have your management team speak to the employees and tell them that certain changes are going to be made within the organization. However, don’t have them reveal that the business is actually being sold until after it has been. By this point, the new owner can introduce themselves while keeping operations as they are for the time being.
More on the topic: Why Confidentiality is Important When Selling a Business