Why Confidentiality Is Important and How to Protect It

Why is Confidentiality Important When Selling a Business?

When selling just about anything, you generally want to get the word out to as many people as possible. A “For Sale” stamp is placed on the item with the goal being to virally expose it. That is certainly not the case when selling a business. Deciding to place a business on the market can create uncertainty, which can consequently affect your bottom line and put the company in jeopardy.

As a society in general, we are accustomed to being transparent and sharing the details about the items we are trying to sell. For example, when you sell a used vehicle, you typically drive around with ‘For Sale- Call XXX-XXX-XXXX!” pasted to the rear window. It’s easy to get sucked into doing the same with a business because, ultimately, the goal is to sell it, and being private and opaque about such a thing seems both foreign and counterproductive to us. Getting caught up in the buzz a listing can create, and the potential reward of a healthy payout can be a major faux pas.

We need to understand that a business is different from almost everything we might sell in our life in that it is not a stagnant body. Unlike your used TV listed on eBay, a business is a living, breathing entity that generates an always fluctuating amount of income/value. It is important to understand that certain actions can affect the value of a business during the selling process.

So, in order to optimize the sale price of a business, keep it confidential!

Why Does This Matter?

Outside of the sale price, there are other reasons why it’s important to keep the sale of a business confidential. Here are some of them:

Employees

Upon catching wind of the impending sale, employees might worry about losing their jobs or potentially disliking the new owner. People don’t usually like change. Change can create uncertainty. This uncertainty may cause your employee(s) to quit. Losing portions of a team is a serious matter, particularly during the sale process. Key staff members provide a wealth of knowledge about the business that buyers will find valuable- both during the transition process and for the company's future. Losing employees can result in taking a hit on the sale price, or even worse, losing potential buyers altogether.

Customers

When becoming privy to a possible sale, customers may think the business is in distress or is having problems that could potentially hinder their ability to access the goods/services the business provides. In addition, customers may begin to question the future quality of the operation under new ownership and management.

Competitors

Once the competition finds out, they will most likely use the information against you. By telling your competitors, they are able to get ahead in the competitive landscape by way of your sale. This opens the door for a lot of bad things to happen.

Vendors

Upon discovery of the business being for sale, vendors may tighten up on terms that directly affect the company. For vendors, it’s all about reliability. If they get the feeling there is unpredictability ahead, they will no doubt react accordingly.

Protection Guidelines

Although retaining confidentiality can pose a challenge, proper preparation can aid the process and ensure that the sale goes ahead smoothly. Following are some things to consider:

1. Advertise the business listing using blind ads

Don't share your personal or business name until you have at least a little bit of information on the prospective buyer and have their written commitment to confidentiality (more on this below). Create a headline for the listing focused on the nature of the business rather than its name. For example, use: Full Service Car Wash; instead of: "Coleman’s Car Wash".

2. Use a non-disclosure agreement (NDA)

As mentioned above, always have the prospective buyer commit to a confidentiality agreement prior to revealing any specific information about the business- name, location, financials, etc. You can work with an attorney to produce your own agreement or you can source a template agreement online and adjust it to fit your unique situation.

3. Avoid holding meetings at your place of business during hours of operation

Although it is sometimes important for the prospective buyer to observe the company's operations in person, it’s best to conduct these meetings after hours. Ideally, any meeting between the seller and the prospective buyer should be conducted off-site.

4. Don’t share any proprietary information until you are working with a serious buyer

Remember, the information is to be delivered in layers. There is no situation where a buyer needs to know the business’ fundamental processes, client lists, trade secrets or detailed financials prior to them committing further into the buying process and demonstrating their ability to make the purchase. A Letter of Intent (LOI) is a document that outlines the proposed terms of the deal and the intentions of both parties to close the deal. It is best to have an LOI in place prior to sharing your company's deepest secrets.

5. Include as few employees as possible

In some cases, it’s necessary to get key employees involved. A serious buyer will want to meet the management team as part of their due diligence process. It’s important to limit the number of employees to an absolute minimum to avoid the pitfalls mentioned above.

6. Establish a private communication system to exclusively deal with prospective buyers

It’s best to be cryptic in your approach- don't provide your office phone number or any shared email accounts as your point of communication with buyers.

Luckily, Tresle ensures all the aforementioned bases are covered- the ability to list a business blindly, access to template digital documents (NDA & LOI), and a private channel of communication specifically designed for selling businesses confidentially.

In Summary

One last thing to mention, the total process of selling a business can take some time. Be patient and don’t let the selling process get in the way of running the business - this can create a downward cycle. There are clearly many distractions and countless important tasks to deal with when selling your business. But one thing for sure is if you neglect the business entirely, you run the risk of decreasing productivity, which can lead to a decrease in sales, a decrease in the overall value of the business, and ultimately, a decrease in the final price at closing.

A buyer wants a successful operation; too many question marks mean greater risk, lower offers, and a greater potential for a prospective buyer pulling out of the deal altogether.

Why Confidentiality Is Important and How You Can Protect It