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 item(s) we are trying to sell. For example, when you sell your used vehicle, you typically drive around with ‘For Sale- Call 123-4567!” 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 lifetime in that it is not a stagnant body. Unlike your used TV listed on Ebay, a business is a living, breathing entity that generates fluctuating income and therefore its value can be based on its environment.
So, in order to optimize the sale price of a business, keep it confidential!
Why Does It Matter?
Outside of the sale price, there are other reasons why it’s important to keep the sale of a business confidential. Take a look:
- Employees - Upon catching wind of the impending sale, employees might worry about losing their jobs or potentially disliking the new owner. In other words, people don’t usually like uncertainty. This uncertainty may even cause your employee(s) to quit. Losing parts (or all) 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 find valuable for both the transition process and the future of the firm. Losing employees can mean taking a hit on the sale price or losing potential buyers all together.
- Customers - When becoming privy to a possible sale, customers may think the business is in distress or has problems that could 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 customers, they are able to get ahead in the competitive landscape by way of your sale. Frankly, 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 (and its cash flow). For vendors, it’s all about reliability. If they get the feeling there is unpredictability ahead, they will no doubt react accordingly.
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:
- Advertise the business listing using blind ads - In other words, 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 below). Create a headline for the listing focused around the nature of the business rather than its name. For example, use: Full Service Car Wash; instead of: Coleman’s Car Wash.
- Prepare 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. You can work with an attorney to produce your own agreement (expensive), or you can source a template agreement online and adjust it to fit your unique situation.
- Avoid holding meetings at your place of business during hours of operation - Although it is sometimes important for the prospective buyer to observe the business in person, it’s best to conduct the meetings after hours. Ideally, any meeting between seller and prospective buyer should be conducted off-site.
- Don’t share any proprietary information until you have a Letter of Intent (LOI) in hand - 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. An LOI is a form that outlines the terms of the deal and the intentions of the buyer to close the deal.
- 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 his/her due diligence process. It’s important to limit the number of employees to an absolute minimum to avoid the pitfalls mentioned above.
- Establish a private communication system to exclusively deal with prospective buyers - It’s best to be cryptic in your approach- don't use your personal name as it can be easily linked to the business.
Luckily, Tresle ensures all the aforementioned bases are covered- ability to list the business blindly, access to template digital documents (NDA & LOI), and a private channel of communication specifically designed for selling businesses confidentially.
One last thing to mention, the total process of selling a business can take around six months to a year to complete. 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, the overall value of the business, and ultimately, the final sale price.
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 alltogether.