Business,Business Tips

Importance of maintaining confidentiality while selling a business

18 Aug , 2015  

Business sale as a process continues for about nine to twelve months, hence confidentiality is critical to the business selling process, irrespective of the size of the business unit. It is absolutely essential for a successful business sale. In fact, to sell the business at its optimum price, the entrepreneur should keep it confidential.

It is true to state that every word will be public when such decisions are taken, however when, what and how much of information is to be made public, should be at the sole discretion of the business owner himself.

1. Letting the news out, apart from creating uncertainty, can pose following threats

  • Employees become insecure and start seeking job opportunities out in the market. They see it as an event which will threaten their well-being. They also tend to share the information with other colleagues, spreading the information further. Losing the key employees during the sale process, can prove to be difficult a situation. This may lead to loss of potential buyers. It is best to disclose the sale to employees only after the deal is successfully closed.
  • Customers may fear a decline in the quality of product/service etc., and shift to competitors. Suppliers might hesitate in renewing the contracts. Potential customers also lose interest in the company’s service/product offerings, if the news of the business sale is out in market.
  • Competitors may indulge in spreading rumors affecting the business sale price. They may even spark aggressive reactions leading to a decrease in the company’s value. Such negative rumors create instability and unease in the market about the company.
  • Creditors too may get nervous and withdraw investment prematurely. This fuels negative publicity and hence affects the sale price adversely.
  • The buyer’s perception gets hampered, if the business selling news is out, prematurely.

An entrepreneur may want to hurriedly complete the selling process, owing to employee attrition, negative rumors by competitors etc. which in turn will cost him as the sale price will drastically fall.

If the business is known to be for sale for too long, it leads to a reduction in selling price as the market tends to develop a perception that things are not on track leading to no prospective buyers.

An entrepreneur should ensure that the business continues effectively, as always.

In order to maintain confidentiality, an entrepreneur should hire a professional/business broker who understands the importance of the sale process and markets the business in an appropriate manner. He can also feed the right and necessary information to buyers, and thereby smoothen the process. He can post Blind Ads, Listings etc., pre-qualify, and register buyer prospects and finally release information in phases. A broker ensures that only serious buyers are dealt with thereby the best deal comes forward. If buyers cannot share the reason of them being interested in the deal, or the amount of liquid cash available with them, or provide references of their business credibility, they are not considered as serious buyers.

2. Blind Ads

They basically camouflage the identity of a business unit. It is a difficult task as the words of the advertisement are to be cautiously chosen. Blind Ads or listings should carry information in a balanced manner, as too little information will keep buyers away and too much information can run into confidentiality issues. This is the simplest and most common way to make sure that no one knows that the entrepreneur is selling his setup.

3. Pre-Qualify Buyer Prospects

This is indeed the best way to keep confidentiality of the business intact. Even before the first advertisement appears the broker or the hired professional has to screen the prospective buyers. These buyers are serious shoppers.


4. Register Buyer Prospects

At this stage the confidentiality agreement/non-disclosure agreement is signed between the buyer and seller. Every buyer must sign the confidentiality agreement, before detailed information or sensitive financial data is provided to him. A confidentiality agreement should be mutual and help maintain confidentiality of information, prohibiting the buyer from making disclosures to others about the business transaction; also it should ensure that confidential information is being used only for evaluating potential acquisition. Some prospective buyers may request to meet employees, however, an entrepreneur should attempt to persuade them to meet employees after the deal is finalized. Employees can meet the new management who can in turn provide job security.

5. Information Release

This strategy helps retain prospective buyers and helps create a desire to know more about the business. It helps in building the sale price.

Entrepreneurs who decide not to hire a broker may create a separate e-mail id to address the buyer’s inquiries. A non-business e-mail address will help disguise the identity of the seller. A selling memorandum is to be prepared so that the confidentiality agreement is signed by the prospective buyer. Very few employees are to be involved in the said process, if at all necessary. All the meetings, with respect to the sale, are to be held after business hours or at an offsite location.

6. Upfront disclosures can help build trust with the buyers and can prove to be an asset in the later stage.

In case the news of a sale of the business is out, then the entrepreneur without panicking should deal with it firmly. He should explain to his employees that such a deal will only secure their future, suppliers / customers will continue to stay with the business if they like the product/service offering as they have the least interest in the business owner, and finally there is no control over the rumors doing rounds in the market as spread by a company’s competitors, irrespective of the decision of sale being known to them or not. Also in case the information is out, then the entrepreneur should decide whether to accept the truth or deflect the question until one is ready to accept the same. Further there are several remedies, in a legal course, in case of breach of confidentiality. A business owner should think like a buyer when preparing to sell the unit.

It is thus concluded that the news of selling a business is best kept confidential, in the interest of the seller himself. Confidentiality is to be maintained till the day the transaction is closed.