Importance of Confidentiality when Buying a Business

Business Sales

The Importance of Maintaining Confidentiality in the Business Sale Process

When a business owner decides to sell their business, one of the biggest issues discussed with Sunbelt Business Brokers is how to maintain confidentiality during the process. When a business owner states they want the business sale to be done confidentially they mean they don’t want the employees, customers, vendors, lenders, etc. to know the business is being sold or even that it is for sale. In addition, confidentiality means that none of the important and confidential information about the business should be tossed about carelessly and wind up in the hands of someone that could use the information to harm the business and the seller.

Confidentiality Agreements

Confidentiality Agreements (CA) are also often called Non-Disclosure Agreements (NDA). Nearly every business owner and business broker will want a potential buyer to sign a Confidentiality Agreement before releasing information specific to their business. In all likelihood a CA will need to be signed before the buyer is even told the name or location of the business. It is very important that you, as a buyer, understand the requirements in the Confidentiality Agreement. You will be expected to honor what you sign and commit to do. Failure to honor the terms of the confidentiality agreement could subject you to legal action and possible damages. If you are unable to understand the terms and commitments in the Confidentiality Agreement please seek appropriate legal advice.

Common Elements in Confidentiality Agreements

Time Frame:You will be expected to maintain confidentiality for a specific time.

Return of Materials: You will commit to return or destroy the information at the request of seller. This includes all hard copy and digital copies. The seller can insist that you do this at any time the seller chooses. Also, you will likely be required to confirm in writing that you have destroyed the information.

Restrictions on Use of Information: Confidential information can only be used by you to evaluate YOUR interest in purchasing the business. For instance, you cannot “pass it along to a friend that might be interested in purchasing the business. You wont even be allowed to state the name of the business for sale to non-professional advisers. You can only release the information to your professional advisers(CPA, Attorney, etc.) who you must then advise that the information is bound bya confidentiality agreement. Furthermore, you will be responsible for what your advisors do with the information. Make sure you tell your advisors theinformation you give them is bound by a Confidentiality Agreement.

Employee Contact: You will be prohibited from talking to or contacting employees without permission of the seller. You will also likely be prohibited from hiring employees or providing information to anyone who could use it in another business to hire or recruit the sellers employees.

Vendors,Suppliers, Customers, Lenders Contact: The same restrictions as Employees,basically, without written approval from Seller you cannot contact any of these parties nor provide information so that others can.

Important Note -There are many different forms of Confidentiality Agreements, some have many more terms and very different terms than above. Make sure you read the agreement carefully and thoroughly understand your obligations before signing any Confidentiality Agreements.

Buyer Insider Tip #1In order to buy a business on the best price and terms its important for the buyer and seller to establish a good relationship. A buyer can get an advantage over other buyers by telling the seller they understand the need for confidentiality and that they will absolutely honor the non-disclosure agreement. The seller will appreciate it and will likely be more comfortable releasing the critical information you expect to receive.

Why is Confidentiality During the Business Sale so Important to the Seller and Buyer?

The sale of a good business is not like the “going out of business sales you see on TV. If there is a going out of business salet he business owner has no interest in “preserving the on-going value of the business. Their only concern is selling the inventory and fixtures.

In selling a good business the buyer and the seller both have an interest in preserving the value of the business in the process. Obviously the Buyer wants the value of the business preserved so that its continued success is possible. The critical value elements that buyer and seller usually want to preserve are:

Employees When word gets out that a business is for sale often the employees assume the worst. Employees may assume the buyer is going to fire them. When buying a business a significant part of the value is in the trained employees. A business buyer does not want the employees to quit. The employees and buyer have a common interest to keep the employees employed in the business. If the business sale rumor causes employees to look for other jobs then the seller is harmed and the buyer is also harmed.

Buyers occasionally want to talk to employees before they buy the business to make sure they aren’t going to quit. This is almost always a bad idea for the buyer and the seller. What we have found works best in most cases is that the employees aren’t told of the business sales until the sale is complete and then the buyer and seller together announce the sale to the employees.That way the seller can “endorse the buyer and the buyer can assure the employees that they all have jobs. This sudden announcement might seem uncomfortable but actually it eliminates uncertainty for the employees that might be created if they hear the business is for sale weeks or months before an actual sale.

Buyer Insider Tip #2 As you near the actual purchase date work closely with the seller on a plan to announce the purchase to employees. Experience tells us you want to make the sale announcement on the first day of the work week so that you, the buyer, has all week to start building a relationship with the employees. You probably don’t want to announce a sale on Friday afternoon then send the employees home for the weekend to sit around worrying about things.

Vendors,Suppliers, Lenders If suppliers hear a business is being sold they sometimes they choose to alter their credit policies until the new owner is in place. If a seller has a vendor that normally sells product to the business and allows the business 45 days to pay the bill and, because of a rumored sale,changes it policy to want payment in 10 days that could have a significant and harmful impact on the day-to-day operation of the business.

Customers For retail businesses the buyer usually has no concern about the need for contacting the customers before the business purchase. However for business-to-business companies there are often concerns and issues to be addressed. If the business has significant customer concentration issues (i.e.,one customer represents 50% of the total sales of the business) the buyer may want to have some assurances that the business will continue after the sale.These assurances can be provided in a number of ways. Examples are contracts in place and/or service agreements that can be assumed by buyer. The Seller and Buyer must work together to determine how to accomplish the goals of both parties how to complete the business sale without damaging the business and also assure that the buyer has a good opportunity to continue the relationship with the customers.

Business Insider Tip #3 Virtually all business sales have a few areas where the buyer and the seller need to be creative to resolve a risk issue fort he buyer that is a confidentiality issue for the seller. Buyers who work with the seller openly, reasonably and respectfully usually end up with the most favorable solution.

Summary When buying a business it is wise to respect the obligations in the Confidentiality Agreement, confirm your commitment to confidentiality with the Seller and be willing to work through the inevitable issues that can only be resolved by being reasonable and respectful of one another’s legitimate concerns.