Business Owners – Can You Sell Your Business Without Telling Anyone?

Why is it important to keep the sale of your business confidential? There are risks in disclosing the sale at the wrong time. Folklore, commonly held beliefs which may or may not be grounded in fact, is an issue with most employees. There is a commonly held belief that when a business is sold the new owner will fire everyone and bring in a completely new crew. Since most hourly employees live paycheck-to-paycheck, it would cause personal hardship if they were suddenly laid off without notice. So, if they suspect the company is being sold, they often find a new job right away to avoid that risk.

But - nothing could be farther than the truth. Why? Tribal knowledge. Tribal knowledge is the knowledge that is owned collectively by the employees about how to do their jobs including relationships with vendors, regulators, customers, and each other. One reason why a business will sell for a higher price than just the value of its tangible assets is to get this tribal knowledge. This is commonly referred to as goodwill. It is very important not to disclose the sale to employees until it has been completed.

It is very important not to disclose the sale to customers, vendors, and especially competitors during the sale process as each of these may have an adverse reaction that could potentially harm the business. Customers may start shopping for additional sources of supply. Vendors may require all purchases to be COD, and competitors may spread the word of the sale in order to scare your customers into leaving your firm for theirs or worse, to hire your key employees.

How do you maintain confidentiality during the sale so that your employees keep doing their jobs and stay loyal to the company? There is a list of tactics which are effective in maintaining confidentiality.

1. 1. Limit disclosure on a need-to-know basis. This would include your transaction team, i.e., your transaction attorney, your accountant, your CFO, your financial planner, perhaps some key employees, and normally, your spouse.
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3. 2. Advertising and direct buyer solicitations must be carefully worded not to disclose any fact which would allow the reader to identify your company. Therefore, advertisements and solicitations must be very generic. The purpose is to attract a buyer's interest to the extent that the buyer is willing to sign a non-disclosure agreement (NDA) also known as a confidentiality agreement. Once a buyer has signed the NDA, then only limited data is given to protect the company's trade secrets and other intellectual property during each phase of the sale process.
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5. 3. Engage a skilled merger and acquisition advisor to manage the process. This not only insulates your business identity from unwanted inquirers such as competitors but enables you to focus on keeping your business performing at its best while the M&A advisor manages the complex, time-consuming sale process. The M&A advisor will also screen prospective buyers to eliminate buyers that don’t fit your business, avoiding disclosure to those who are probably not going to buy.
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7. 4. Maintaining strict controls over documents and information is essential. Only certain information is released at each phase of the selling process to protect sensitive information such as customer names and employee names. M&A advisors provide this service.
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9. 5. Using a Virtual Data Room (VDR) to manage all documents prevents accidental disclosure and hacking. Normally, a skilled administrator manages the data room, giving limited access to buyers and their advisors, controlling levels of permission to documents for each stage of the sale process. M&A advisors provide this service.
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11. 6. Key employees who participate in the sale process must be committed to confidentiality. In many business sales the founder is retiring. Buyers will rely heavily on the management team to continue operating the business after the sale is completed. It is common that the management team will be involved in discussions with prospective buyers in the later stages of the process, so the management team will need to know that the business is being sold. To align the owner’s interests with the management team’s interests, owners usually require signing an NDA and often provide a “Stay Bonus”. The purpose of the bonus is to assure buyers of continuity of operations, so the bonus is normally paid by the seller one year after the sale is completed.
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13. 7. Communication strategy is important. Simply stated, the communications strategy is to plan, organize, and release documents and information only at the appropriate time in the sale process. Generic information is released first, and the most sensitive information is released last. Everyone involved in the sale process must be informed about the communication strategy to ensure they are keeping sensitive information until the appropriate time.
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15. 8. Full disclosure is reserved for the due diligence phase. Once an offer has been accepted, the buyer’s auditing team will examine everything about the business including transaction level details and all sensitive information. However, the most sensitive information is not released until the initial phases have been successfully completed.

In summary, it is very important to maintain confidentiality when selling a business to prevent harming the business in the sale process. Most important is employee retention, followed by customer retention, vendor relationships and intellectual property confidentiality. An experienced M&A advisor can manage confidentiality issues on a daily basis in providing services to sellers of established businesses, protecting the business in the sale process, and enabling the owner to continue running the business for optimal performance.