Confidentiality in a sale is maintained by process. Good intentions do not accomplish it. A business that becomes known to be for sale can lose employees, customers and negotiating position before any buyer has made an offer. The protection comes from controlling what is disclosed, to whom, and in what order.
What a leak costs
The risks are specific.
Employees worry about their jobs and begin to look elsewhere. The first to leave are usually the most capable, because they have the most options.
Customers question continuity. Some delay orders. Others open conversations with a second supplier as a precaution.
Competitors use the information in their sales calls. A statement that a rival is being sold and may not be around is an effective way to win an account.
Vendors and lenders may tighten credit terms.
Each of these affects earnings during the very months a buyer is examining them most closely.
Staged disclosure
A well-run process releases information in layers, and each layer requires the buyer to demonstrate more commitment.
- The blind summary. A one-page description gives industry, general region, approximate size and reason for sale. It does not name the company or include details that would identify it.
- Qualification and NDA. Before learning the company's identity, a prospective buyer signs a confidentiality agreement and provides evidence of financial capacity and relevant background.
- The confidential memorandum. Qualified buyers receive a full description of the business, its financial results and its operations.
- Management meeting. Buyers who remain interested meet the owner, usually off site or after hours.
- Diligence. After a letter of intent is signed, the buyer receives detailed records through a secure data room.
The most sensitive material, such as customer names, pricing, employee compensation and proprietary methods, is held until late in diligence. In some cases it is released only days before closing.
What an NDA should cover
A confidential valuation
A valuation establishes what the business would likely command today and identifies the factors that could improve its value before it goes to market.
A confidentiality agreement is the foundation, and its terms deserve attention. A sound agreement addresses the following.
- The fact of the sale itself. The buyer may not disclose that the business is for sale or that discussions are occurring.
- Permitted recipients. The buyer may share information only with advisors and lenders who need it, and is responsible for their compliance.
- Non-solicitation of employees. The buyer agrees not to recruit the company's staff for a defined period.
- Non-solicitation of customers, where the buyer is in the same industry.
- Return or destruction of materials if discussions end.
- Term. Two to three years is typical.
An NDA has limits. It deters careless disclosure and provides a legal remedy, but enforcing it is costly and proving a breach is difficult. The agreement supports the process. It does not replace it.
Handling competitors as buyers
A competitor is often the buyer able to pay the most, because it can combine operations and eliminate duplicate costs. It is also the buyer most able to misuse what it learns.
The usual approach is to approach competitors selectively, require stronger agreement terms, and restrict what they see. Customer identities can be replaced with codes. Pricing can be shown in aggregate. Detailed records can be limited to the competitor's outside advisors until the transaction is nearly certain. An owner should also decide in advance whether there are specific competitors who should not be approached at all.
Practical habits that prevent leaks
Many leaks come from small lapses.
- Use a personal email address and mobile phone for all sale communications.
- Hold meetings and site visits outside business hours, or describe visitors as consultants, insurers or lenders.
- Keep sale documents out of shared company drives and off office printers.
- Limit advisors to those who need to be involved, and confirm that each understands the sensitivity.
- Prepare a plain, truthful response in case someone asks directly. Many owners say that they are approached from time to time and always listen, which is accurate and ends the conversation.
Telling key employees
Some employees must be told before closing. The controller is often needed to produce diligence materials. A general manager may be essential to the buyer's decision.
When a key employee is brought in, three steps help. Have the employee sign a confidentiality agreement. Explain what the sale means for that person's role. Consider a retention bonus payable after closing, which aligns the employee's interest with a successful transaction and gives the buyer comfort that the person will stay.
The rest of the staff is normally told at or immediately after closing, with the buyer present. The message should cover what is changing, what is staying the same, and what it means for their employment and benefits.
Telling customers
Customers are generally informed after closing, through a joint communication from seller and buyer. The exception is a customer whose contract requires consent to assignment, or one large enough that the buyer insists on a conversation beforehand. Those meetings are scheduled late, once financing is approved and the remaining conditions are few.
If a rumor starts
Despite precautions, word sometimes gets out. A prepared response matters more than a perfect one. Address it promptly with the people affected, avoid statements that are untrue, and emphasize what will not change. Then move the process forward quickly. The period of uncertainty is what does the damage, and a shorter one does less.
Twelve31 Advisors runs each sale under a mutual NDA, staged disclosure and a controlled data room. An initial conversation is confidential and without obligation.
