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Seller Question #6: How do I Maintain Confidentiality When I’m Selling my Business?

Seller Question #6: How do I Maintain Confidentiality When I’m Selling my Business?

Maintaining confidentiality during the process of selling your business is critical – there is simply no sugarcoating this statement. It does a business owner absolutely no good, and in fact can be potentially damaging to the business, if employees, customers, competitors or vendors find out your business is for sale.

Buyers and Confidentiality

Buyers happen to be the group of people that require the most confidentiality management, but at the same time require the most access to confidential information. A key thing to consider when developing your confidentiality plan for buyers is the old Stephen Covey adage, “begin with the end in mind.” That is to say that whoever buys your business will ultimately have been provided full access to all of your confidential information by the time closing rolls around.

With that in mind, you have to determine at what point in the process it’s appropriate to disclose different kinds of information to buyers so that they can progress through the evaluation of your business and ultimately close. At some point in the process of evaluating and purchasing your business, buyers may want to:

  • Visit your facility and meet you
  • Review your financial statements and other detailed financial records
  • Have access to detailed company information, like payroll, insurance and debt sources, to name a few
  • Know who your customers are
  • Possibly meet some of your customers
  • Meet your key employees and ensure they want to stay with the business
  • Talk to your vendors
  • Talk to your landlord
  • And many, many more…

Just take a second to think about the kind of information and access you would want if you were buying your business, and it becomes easy to see how much confidential information must be disclosed to actually close a transaction. This list could be much longer!

So what becomes critical to a successful transaction is developing a customized plan that allows buyers to get what they need in order to move forward through the process of evaluating and purchasing a business. But at the same time doing this in such a way where your confidentiality is properly maintained at all times and information is only released when it’s appropriate.

Employees and Confidentiality

When it comes to confidentiality, determining how to handle your employees is probably the biggest balancing act you’ll have. On one hand, you want to be honest with your employees and not deceitful, but on the other hand employees should be on a “need to know” basis, with you deciding when they need to know.

This is also a major topic of conversation for buyers. The majority of buyers would love to have access to your employees very early in the due diligence process, but in most cases that’s just not prudent on your part to allow. One of buyers’ biggest fears is that employees will leave when the ownership changes, so they’d like to get some sort of reassurance prior to closing that this won’t be the case. But at the same time, owners don’t want their employees finding out the business is for sale too soon, out of the fear that it may scare them and cause them to look for other jobs.

As a general rule, if a business has some key employees that are vital to the success of the business, it can be a good idea in many cases to inform those employees about the sale and introduce them to the buyer at the appropriate time. Typically, the timing for this is going to be in the weeks leading up to closing, when everyone is confident the deal is going to go through. Ultimately, every business, owner and buyer is different, so every deal will dictate the “right” time to tell employees based on these different players.

Customers and Confidentiality

You don’t want your customers to know you’re selling your business because you don’t want them to worry about changes to the quality, consistency and continuity of the product or service you provide them. If customer confidence starts to waiver, your business could potentially be damaged – either immediately or in the future.

So when should customers find out the business is for sale? The answer here depends greatly on your business and the types of customer relationships, contracts and/or history it maintains with those customers.

In some cases it may be important for a seller and buyer to meet with a customer during the due diligence process. For example, if a company has a contract with a customer that accounts for a large percentage of the business’ revenue and that contract must be transferred, there’s a good chance the buyer is going to insist on getting that transfer approval prior to closing. In other cases customers may never be “officially” informed the business was sold, by design, because the buyer felt confident that a smooth transition is all that was needed to keep the customer happy.

Generally speaking, the best method to deal with customers in a business transition like this is to make it a non-event. There are ways that you can introduce the new owner to key customers without as much as raising a red flag, and then you slowly transition out of that relationship while the new owner takes control.

Competitors and Confidentiality

If there is one group of people you want to maintain confidentiality with more than any other, it’s your competitors. I can’t think of a single good reason to ever disclose your plans to sell your business to one of your competitors. Rest assured, if your competitors find out you’re selling your business, it won’t be long before your employees know, your customers know and your vendors know – because it can potentially benefit your competitors for all of those people to find out.

That’s why it’s critical for the listing and marketing program you develop makes confidentiality the focus of every step. There is a good chance your competitors will catch wind that a business like theirs is for sale and they will probably go do a little poking around to see if they can figure out who it is. So it’s imperative that the marketing for your listing is professionally created to protect you from this type of snooping.

You’d be shocked how many listings out there blatantly divulge the identity of the business that’s for sale. The trick is to provide enough information to potential buyers for them to get interested in learning more without giving away the farm – that’s where true professional representation can be worth its weight in gold for you.

One side note on this topic – what if a competitor is truly interested in buying your business? How do you handle that? This gets back to the idea of professional representation – in our office specifically, the marketing programs are developed in a way that is suitable for competitors and general buyers alike, and before any buyer receives confidential information we know who they are?

Vendors and Confidentiality

Vendors, suppliers, service professionals – these are all groups of people that are important to your business and will also be important to the new owner of your business. So they will need to be brought into the loop at some point about the sale.

While these groups may seem harmless and would never pose a confidentiality problem, it’s exactly that type of dismissive attitude that makes them so important to manage. Most of the time a business owner will confide in a vendor that the business is for sale, or simply mention it in passing, not really thinking about the potential ripple effect it could have.

Don’t forget who these vendors also have relationships with – they may talk to your employees, they probably work with your competitors, and they may even deal directly with your customers. So there is a high risk that a vendor could innocently pass along some very confidential information to a key person.

With that said, there does come a time where you need to start talking to vendors about transferring accounts and agreements from you to the new owner – just make sure that happens at an appropriate time in the process.

I could literally host a multi-day seminar covering the ins and outs of confidentiality as it relates to the sale of a business – this is a topic that is that important. Whether you’re considering selling your business this year or in 10 years, it would be prudent to contact a reputable business broker, like Sigma Mergers & Acquisitions, today for a no cost, no obligation business valuation. This is not only a great way to examine your business’ value, but also a way to discuss the unique confidentially challenges your business may present, and start building a plan for how to manage those.

 

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