Selling a Business: Confidentiality
16 May 2022: Selling a Business: Confidentiality
Confidentiality. Why is it so important when selling a business?
We get this question all the time. When it comes from business owners that become clients, they fully understand our answer – and the damage that ignoring confidentiality can do to their business. When the question comes from business owners that are determined to sell their business themselves, the response is generally a version of, “Confidentiality?!? We don’t need no stinkin’ confidentiality!”
And when we next hear from them the damage is done.
What damage? Let’s look at a couple of ways the business can be damaged if confidentiality is not maintained by all involved.
Neglecting Confidentiality is a Killer
A breach of confidentiality can negatively impact what the business ultimately sells for and even derail altogether a deal that’s in the pipeline if the disclosure happens midstream. In many cases it can cause irreparable harm to the business itself.
And there are many ways that news that the business is for sale can leak. From certain documents left where an employee can find them and meetings with buyers or advisors that aren’t secure to idle talk at home around the dinner table
There are generally three groups of people that, if any of them hear or suspect that the business is for sale, can start the inevitable snowball effect that spreads the news – or the rumor – throughout the community or industry, with potentially devastating impact on the business.
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Employees have the potential of inflicting the proverbial double whammy.
If somehow the news reaches the employees, some of them may be afraid that their job will not be secure under new owners; or that they may not get along with those owner; or that their compensation and/or benefits might be altered, and not in their favor. As a result, some of these employees will start looking around for another job.
If that happens, anyone or any business they speak to about employment options suddenly becomes an accelerator for the news or rumor and it gathers speed.
If these employees are talented and important to the business’ performance, that performance is likely to suffer as they now have their future employment rather than the business’ productivity top of mind. And if these employees leave, they are likely to go to competitors, thereby doubling down on the damage to the business.
Buyers, of course, want to make sure that the business they buy will include all the important employees. If one or more leave, a buyer is likely to find the business less attractive and reduce the offered price – or even terminate negotiations.
Customers and Clients
If the customer base hears rumors about the business being on the market, they will immediately fear the worst and start asking questions of friends and neighbors that start with, “Did you hear…” or “Do you know why…” thus spreading the news even further.
In such circumstance, it’s not uncommon for people to begin expressing concerns about the company’s viability. Why are they selling? Are they in trouble? Will it survive?
They’ll start wondering whether future owners will provide the same level of product or service as they’ve enjoyed in the past. They’ll start looking for alternative suppliers for those products and services, “just in case…”
It is even more important than usual for a business owner to focus on customer loyalty when starting the selling process. Your customers/clients are the lifeblood of your business. If they start wavering in their support and sales suffer, the value of your business will suffer as well.
Suppliers, Vendors and Creditors
If, over many years, the business’ current owners have developed strong relationships with vendors and suppliers, any favorable terms that resulted from those relationships could be revised to less-favorable ones – or even disappear altogether. Deliveries could even be suspended pending clarification from the current owners.
Banks and other creditors have likely extended credit based on the reputation and history of the current owners. Creditors are very risk-averse and new ownership almost always presents unknown risk. Any such credit lines could be terminated.
That fact notwithstanding, if the transaction is a strategic acquisition and the buyer is a known quantity, creditors may not experience too much discomfort upon hearing the news. But the initial impact will always be one of recognizing that “…the terrain is about to shift and we’d better be alert”.
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And if they “hear the news” from someone other than the business owner, alarms will be going off before the sun goes down.
Any accounts or borrowings that were based on relationships – or “handshakes” – could quickly need personal guarantees.
Yes, the possibility of any sale or potential sale must be disclosed to vendors and creditors. But that disclosure must be timed properly and, most importantly, must be made by you, the business owner.
Negotiating leverage with potential buyers will be lost if word gets out that the business is for sale.
Confidentiality is important to most buyers. They don’t want their competitors to know what they’re doing. This requires them to keep their intentions from their own employees, customers and vendors. This is particularly the case when a company is embarked on a strategic acquisition – which is often the case when the business being sought is one with revenue north of $4m or $5m.
Public knowledge that a business is for sale will just as often scare buyers away as not.
Buyers and Confidentiality
Even in the case of a financial acquisition – an individual or group of buyers, or a small private equity firm or family office that is buying for the cash flow rather than how the business will provide synergy to an existing business – it behooves the buyer to want to maintain confidentiality that will actually allow the deal to close with the smallest possible number of individuals being aware of it.
Even buyers of smaller businesses – at least the smart buyers – want the effort to remain confidential.
Some buyers – especially first-time business owners – want to see their name in lights. They issue press-releases, take out ads announcing “under new ownership”, brag about it on the golf course and generally want the world to know that they are now the owner of a business!
But they forget that all of the downsides outlined above – employee concerns, customer concerns, vendor and creditor concerns – still obtain and are likely to effect the business to one extent or another.
A smart buyer will prefer that the transfer be done quietly and, to the extent possible, invisibly. To accomplish this the seller must be fully on board. In fact, the buyer will generally require the seller to stay on for an extended – six-12 month – transition period during which the new owner gradually steps to the forefront and becomes the new face of the business.
The ideal situation is for a customer, vendor or non-management employee to discover, a year after the deal closes, that the business had new owners for a while.
The Bottom Line
Selling a business is, in most cases, the crowning finale of many years of blood, sweat and not a few tears of building and growing your “baby” in the face of countless headwinds, speed bumps and roadblocks encountered around every other turn in the road. Being successful in this effort involves knowing how to negotiate what is a complex and meticulous process that is challenging enough for professionals – and beyond the ken of most business owners.
Granted, that hasn’t stopped untold numbers of owners from trying to sell their business themself – or even enlist the help of a real estate agent to get it sold. We’ve been doing this for more than 20 years and have heard dozens of horror stories in cases where the business owner opted for one of those paths.
Maintaining confidentiality is a critical piece of the process and is overlooked at the owner’s peril. Assemble a team of professionals, players with the training, experience and skills needed to pull off a successful transition. A professional business broker or M&A advisor will navigate the rough waters of this process and in doing so steer the transaction so that confidentiality is maintained. Doing so should significantly increase the likelihood of success and maximum value.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com