Selling a business: why confidentiality counts in selling your business

Realtors want to get the word out as quickly and widely as possible so that everyone knows a particular house or building is for sale.  In selling a business, you do not want anyone to know your business is for sale.

Broadcasting that your business is for sale introduces risk.

Employees will have questions you can’t fully answer. Insecure about their future, they may look elsewhere for a job. Losing key employees could affect the sale of your business. Buyers count on taking over a business with skilled staff.

Customers might go elsewhere, reducing your sales and profit, making your business less attractive to a buyer.

Suppliers may think you’re having financial difficulties and take steps to protect themselves, demanding cash rather than credit and transferring your exclusive agreement to a competitor.

Competitors may take advantage of what can be a period of uncertainty to chip at your business base.

All these are risks that could leave you with less money in your pocket, while you sell and at the sale.

And what if the deal collapses at the 11th hour? The impact on those with an emotional investment in the deal can be damaging.

Signing an NDA

So how do you get the word out to prospective buyers without setting off any alarms?  Who can you talk to? Who do you need to talk to? How much information do you release and when?

Business brokers have established systems to protect the confidentiality of a business. A broker with a well-established firm can expose the opportunity to hundreds of prospective buyers without employees, customers or a competitor knowing the business is for sale.  Advertising won’t specifically identify the business.

A broker will also screen prospects to confirm their resources and potential for assuming your business, so you don’t waste time with “tire-kickers” or scammers.

A more detailed business prospectus is only provided to qualified prospective buyers after they have signed a strict and detailed, legally enforceable, non-disclosure agreement (NDA).  An NDA creates a confidential relationship between the parties to protect any type of confidential and proprietary information or trade secrets, such as processes or formulas they don’t want competitors to see.  It also prohibits the potential buyer from letting anyone know you’re selling.

Meetings are facilitated between the business owner and buyers we feel are serious. Then, if the seller agrees, we release the Confidential Business Profile, giving the buyer proprietary financial and operating information, including strengths, weaknesses, opportunities and threats facing the business, to make informed decisions about proceeding with an offer.

Discretion’s the word

Confidentiality ensures that information is accessible only to those authorized to have access. Until a deal is done, it’s best to tell only your trusted professional advisers; even then you have to ensure they keep the transaction confidential. Some are already bound by professional provisions—lawyers are obligated to protect client confidences as are accountants. You will need tax, financial, legal and perhaps investment advice prior to going to market.

There are some circumstances where early disclosure is advisable or even required:

  • You should never assume that the landlord will approve the transfer or assignment of a lease to the buyer. I speak to landlords as early as possible, but only with a signed NDA in hand.
  • If it’s a franchise, you can only sell your rights to the business and franchise with the agreement of the franchisor, so you need to know what conditions and costs may be involved in obtaining their approval.
  • Any business with multiple shareholders has to ensure that all are on the same page when it comes to selling the business.  Never assume all will agree.
  • Problems can also arise when selling a business operating as a partnership without a formal agreement.  One partner may feel they’ve put more into the business than the other, deserving a bigger share. You don’t want dissension after an offer has been accepted.

Some buyers will approach a commercial lender for a loan. That introduces risk: the bigger the organization, the higher the risk. If I need to disclose information to someone at a bank, I ask them to sign a confidentiality agreement. I remind them that if they reveal something that comes back and hurts my client, then the bank is responsible.

The buyer and seller are themselves sometimes responsible for confidentiality breaches. They’re so excited, they want to share the news with their family and close friends.

When should a seller tell their employees?  When the deal is done!  It’s the same for key customers. You’ll want to introduce the buyer and give both staff and clients confidence about the changes to the business after closing the deal. There are exceptions: sometimes the seller’s in-house accountant or a key staff member are necessary in getting to a close and need to be brought into the seller’s confidence. Make sure they understand the need for confidentiality.

The shorter the time frame to sell your business, the less chance of word slipping out.  You’ll become more familiar with the steps in that process as our series continues.  Next up will be building value in your business.

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One response to “Selling a business: why confidentiality counts in selling your business

  1. Pingback: Buying a business: the process | At the Broker's Table

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