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Confidentiality: Why Keeping A Deal Quiet Is Important To Business Sellers

Business owners should keep the fact that they want to sell confidential. Before releasing information to prospective buyers, those buyers should commit to confidentiality in writing (Confidentiality Agreement / Non Disclosure Agreement) and should understand why it is important. Business brokers & intermediaries make commitments to owners of each listed business to keep the sale confidential for many reason (five of them are listed at the bottom of this blog post).

In order to keep these commitments brokers and agents must require each buyer to maintain confidentiality. This means that business buyers agree not to do anything that would let anyone know that the business is for sale or let anyone learn any of the information about the business that they discover in the process of examining it. The only exception is that buyers may inform their advisors, such as attorneys and accountants, in order that they may assist in the process. 

These professional advisors must first commit to maintain confidentiality. This is a very serious commitment as the business may be harmed if confidentiality is violated, and the person who breaches the confidentiality commitment may be liable for damages.

To maintain confidentiality all communications must be strictly between the buyer and the seller and/or his agent, i.e. the buyer agrees not to contact the business owner, its employees, vendors, landlord, accountant, neighbors or especially customers. Buyers agree to visit only when they make an appointment approved by the owner. Buyers must agree not to discuss the sale with friends or coworkers - it is a very small world!

When touring a business being sold be sure not to speak in front of employees or bring any confidential materials provided by the seller or an agent to the business premises being toured or checked out. Employees can and have found confidential business summaries on the tables in businesses after a buyer/seller/broker/agent meeting!

What can happen if confidentiality is breached?  Here are some things that have happened:

1. Primary vendors put the business on COD terms causing a major financial crisis for the owner.

2. Half of the employees quit in a panic because someone started a rumor that the new owner was going to fire everyone (never true, but employees don't know that) rather than wait to be fired, they sought and found new jobs.  The owner was unable to operate the business profitably.

3. Competitors have used the fact that the owner was selling to sell against the business, pointing out to prospective customers that any guarantees would be worthless after the sale (not true, but scares customers and may influence their purchase decisions).

4. Employees found the offering information left behind by a prospective buyer. When they learned how profitable the business was, they demanded pay increases from the owner!

5. The word got around inadvertently to employees, who started stealing large quantities of cash and merchandise, thinking that the owner would be gone before he discovered it.

The world is sometimes a very small place. The theory of networking says that each of us is separated from any other human being by no more than five degrees of separation. If you speak about the sale in front of strangers, one of the people who overhear may turn out to be the spouse of a key employee in the business, or a vendor. So pretend you work for the CIA and that all of the information about the business "including the fact that it is for sale" is mission critical, top secret information!

Categories: BizBen Blog Contributor, Buying A Business, Deal And Escrow Issues, How To Buy A Business, How To Sell A Business, Legal Topics, Selling A Business

Contributor:

Peter Siegel, MBA
Areas Served: Nationwide - All Areas
Phone:  925-785-3118 Cell, 925-785-3118 Text
Peter Siegel, MBA - Founder Of BizBen.com (since 1994), I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I advise/coach buyers, sellers, and brokers daily about buying & selling small to mid-sized businesses throughout the Nation. I can be reached direct at 925-785-3118.

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