You are looking at selling the business you have built over many years. You are excited about the prospect of retiring or maybe pursuing another venture. And, you are bursting at seams to tell your friends and colleagues! But doing so could kill the deal and cause all that excitement to fade away all too quickly.
When selling a business, it is critically important to remember that confidentiality matters. When customers, employees, competitors and suppliers learn that a company is on the market, things change and, often, not for the better…at least not right away. Change is feared by many people and effectively managing the messaging of a change in ownership is critically important to preserve relationships and company value.
This brief article discusses confidentiality and nondisclosure issues in the context of the sale of a business, and proposes ways a business can protect its confidential and proprietary information.
First, be selective about who you tell that your business is on the market. The general rule of thumb should be that, if someone does not need to know, just don’t tell them. This certainly includes employees, vendors, clients, business associates, and yes, maybe even your best friend. You will clearly need to tell certain people in your organization, particularly those involved in assessing an offer, producing due diligence documentation, and negotiating the terms of a deal. In addition, outside advisors, such as your attorney, your accountant, and others will play an integral role and will need to be brought into the fold quite early in the process. In any event, when disclosing the news with any of these individuals, impress upon them that the information is not public and ask that they keep the potential sale confidential. As discussed, below, it may also be appropriate that they sign a nondisclosure and confidentiality agreement in favor of your company.
Second, while it is not always possible, try to approach potential suitors who you know and trust first, always impressing upon them that the information you are about to confide is confidential. And, while competitors are sometimes the best prospects, disclosure to them should be carefully considered with a strong understanding of the risks involved. When approaching a company, there is often an inclination to go to the person within the company that you know. In fact, going to the top of the organization, to the person who will make the decision as to whether to consider buying your company, is the better approach. And, finally, consider using an intermediary, a business lawyer or business broker to help gauge interest in purchasing the company while keeping your identity confidential.
Third, once a prospect is identified, they will want to engage in a process known as due diligence. This involves a review of substantially all of your books and records, often including financials, customer contracts, employment agreements, and even your intellectual property and trade secrets. Access to this type of information is customary, but should be carefully managed and should be shared in progressive stages, dependent on the prospects level of interest and the status of discussions. The disclosed information should, however, always be the subject of a nondisclosure and confidentiality agreement. In addition, the disclosure should be controlled by your attorney or other advisor to ensure that documentation that is being produced is appropriate, that it is not the subject of a nondisclosure provision with another party, and that its disclosure does not violate applicable laws. For instance, the disclosure of social security numbers, certain personnel information, or information about a person’s health may result in liability on your part.
With all this in mind, the best way to protect your business and the impending sale of your company is to require individuals and businesses who will either be “in the know” or will be the recipient of books and records, to sign a nondisclosure and confidentiality agreement. Variations of the agreement should be signed by key employees who are integral to the sale, as well as third-party consultants and advisors. Most importantly, such an agreement should be executed by the prospective purchaser and, its further disclosure to its advisors and consultants should be carefully orchestrated.
The agreement should obligate all recipients of data and information to ensure that it is kept confidential to at least the same extent that they protect their own confidential and proprietary information. It should also provide for penalties and remedies, in the event a receiving party uses the information for any purpose not specifically related to evaluation of the business in anticipation of its purchase or otherwise discloses the information to any other party for any reason whatsoever. Remedies should include injunction, where a court can order someone to keep the information confidential, as well as specific performance, where a court can require a party to do or not do a specific thing.
While none of the strategies discussed in this article guaranty the often desired secrecy around the prospective sale of your company or nondisclosure of confidential information, they will certainly minimize the chance of the wrongful disclosure of documents or publicity around the sale before you are ready to share the big news.
For questions about this article, or any other business related matter, please contact an attorney in our Business and Transactional practice group.