Avoiding confidentiality breaches in a business sale

John C. Johnson, CBI, M&AMI

Safeguarding confidentiality is a critical concern in a business sale or acquisition. Extending far beyond the formulation of a well-crafted agreement, keeping confidential matters confidential is a comprehensive commitment through the entire acquisition process.

Nevertheless, many business owners rely on unfounded assumptions or informal understandings that confidentiality will be maintained, or they enter into inadequately crafted – and unenforceable – agreements. These oversights often stem from misinformation or from penny-wise, pound-foolish attempts to minimize costs. Whatever the underlying reasons, the consequences of not protecting sensitive information can be catastrophic.

A Business Sale Gone Awry

To appreciate the importance of confidentiality protection in a business sale, consider this true-to-life experience involving a large conglomerate’s spin-off sales of two subsidiaries.

The parent corporation engaged an M&A broker to manage the two sales. The successful sale of the first subsidiary set a positive precedent, but, during efforts to sell the second, a smaller competitor’s owner approached the parent company’s CEO directly. The seller told the buyer prospect his price, and the buyer said that it was fair. The buyer expressed a strong aversion to a lot of paperwork and to working with intermediaries and insisted on a direct CEO-to-CEO negotiation. The seller should have seen the red flag when the buyer refused to sign a confidentiality agreement, deeming it excessively restrictive.

The seller committed to honoring the broker fee agreement; nevertheless, the M&A broker gave strong counsel against proceeding with that buyer. The seller disregarded his advice and pursued the sale. The seller then gave the buyer all of the sensitive business information that would be needed to complete the sale. After the buyer dug into all aspects of the business, he abruptly withdrew, claiming lack of interest and rejecting the seller’s asking price.

The seller began observing with dismay the subsidiary’s stark decline in business, as the former buyer prospect:

• hired away the seller’s key sales personnel and targeted the seller’s customer base, and
• misled customers by claiming, “They are for sale. We looked into purchasing them. We found lots of serious issues, and they may not survive much longer. Consider buying from us instead.”

As this case study painfully illustrates, it is imperative to protect sensitive information regarding a business at every interaction and stage of the sale – marketing, negotiation, and due diligence.

A strong confidentiality contract is an essential qualifier. A buyer’s objection to such a contract is a clear warning sign that major problems will surface at every step of the deal – including, as in the above scenario, feigning interest as a ploy to gain sensitive information to use to their own advantage.

How Confidentiality Protection Benefits the Business Owner

• Attracting top-tier buyers and maximizing value necessitate a skillful approach to information dissemination. Uninformed owners may inadvertently compromise their own sale by sharing with a buyer too much information, or sharing it prematurely.
• Disclosure that an owner is contemplating a sale can severely undermine the business. Such knowledge may threaten relationships with customers, employees, vendors, and lenders. Continuity of those relationships is vital for transferable value, which directly impacts sale value.
• Confidentiality may be required under privacy, anti-trust, labor, and other regulatory requirements.
• Disruptions arising from premature or unintentional disclosure can erode trust and morale at the business and divert management’s focus from profit-generating activities.
• If a business merger or acquisition is known by many to have been rejected, the overall value may suffer as buyers may suspect underlying issues.
• Similarly, buyers’ expectations regarding future business value may be lowered.

The Value of M&A Professionalism

With respect to confidentiality, a key value of using a skilled M&A professional lies in:

• striking a delicate balance in information exchanges;
• disclosing appropriate information to appropriate parties at the appropriate time; and
• ensuring that binding nondisclosure agreements cause prospective buyers to honor the seller’s confidentiality requirements.

Experienced intermediaries possess the skills necessary to meticulously safeguard confidentiality while maximizing transaction value. This requires solid agreements and a comprehensive process that is thoughtfully designed, controlled, and executed, to discreetly share information while nurturing buyer interest at every stage, from initial contact to closing.

Beneficial and ethical principles in a business sale are upheld when it is managed by an experienced M&A intermediary that employs a disciplined, professional process. An intermediary’s fundamental functions include protecting the seller’s business position and value – a mission that is supported by:

• safeguarding confidentiality;
• reducing management distractions and other risks;
• enhancing operational efficiency, effectiveness, and momentum; and
• accessing comprehensive market knowledge and buyer relationships.

IBG Business is a nationwide business transaction advisory firm with decades of experience assisting business owners with discreetly handling the most private aspects of their businesses. Our knowledgeable and experienced team of advisors have performed business valuations as well as taken businesses to market to sell and implement business purchases, mergers and divestitures. These activities offer unique insight into key confidentiality issues that business owners may face.

To learn more and get started on the right track for the successful sale of your business, contact any member of the IBG Fox & Fin M&A team.

John Johnson is a co-founder of IBG Business and managing partner of IBG’s Central States Region.

***********

MORE ARTICLES ON CONFIDENTIALITY IN A BUSINESS SALE:

• Why Is Confidentiality Important in Selling a Business?
• Selling Your Business? An M&A Professional Can Keep It Confidential
• Confessions of a Do-It-Yourself Business Seller