Why Confidentiality is Critical when Selling a Business

The business purchase and sale process is one that is unfamiliar to most people. Selling a business is different than most real estate deals and business buyers are usually surprised at the discretion that business owners take when selling a business. This article will comment on some of the main reasons why discretion is paramount when we sell a company.

Why is confidentiality so important during a business sale?

Employees
Most business owners do not want to let their employees know that their business is up for sale. During a business for sale transaction, one of the most important things that a vendor can do is to maintain the stability of the company’s operation. Business buyers do not like unnecessary risks and the best thing that an owner can do is maintain an aura of stability and calm during the sales process. There is the risk that if employees found out about the business for sale then they might start to question the stability of their employment and start to look elsewhere.

Vendors
A business does not want to let their vendors know that they are selling the business. A company wants to ensure that their supply of merchandise is solid and also that the vendors do not spread the word about the company for sale and potentially inform employees or customers.

Customers
Selling a business is unique in that the identity of the business is not disclosed when it is advertised. A business owner would not want to let their customers know about the business sale. Sometimes customers can be suspicious as to why the business is for sale. A business owner would usually like to control how the sale is communicated and when. Conversely, a business buyer would also like to be involved in the messaging of a the sale and inform customers and other parties on their terms and timetable.

Why is it important to manage how customers are told about the business sale?

Selling a business is a delicate process in that the new owner would like to have as seamless a transition as possible. Especially with small businesses for sale, the buyers would like to be introduced by the old owners during the training or transition period. This allows the new owner to be properly introduced to the customer base and show clients that nothing will change with respect to the service they’re accustomed to receiving. Managing the disclosure of the sale is important for this reason.

Why is detailed financial information not readily available to all interested “buyers”?

The reality is that most business “buyers” will never buy a business. There are many, many window-shoppers and it is important for the business owner that sensitive financial information be only given to serious buyers. This is a major way in which selling a business is different than selling a house or property. A business buyer must be content to proceed on the basis that they will not be given 100% of the financial information upfront and that they must be prepared to go to the offer stage without the benefit of full disclosure. Typically, when we sell a business, we ask buyers to sign a confidentiality agreement. They are then screened and qualified by us (the business broker) before they are invited to view the business. At this point they are given just enough information to decide whether or not they want to buy the business but full disclosure only occurs during the due diligence process. Due diligence is entered into only after a conditional sale is agreed upon along with a deposit.

Selling a business is a very unique transaction. Not only is it important to manage the financial and ‘factual’ part of the deal but it is also important to manage the flow of information to ensure that confidentiality is respected.