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Why Is A Small Business Sale Kept Confidential? How Is That Done?



Posted By: Timothy Cunha JD, Business Broker: San Francisco Bay Area.   Recently a business owner asked me on the phone, "Why do you keep the sale of a business confidential? How do you keep the sale confidential - any good tips?" Would like to hear from other Members - what would be your answer to this business owner? ProIntermediaries on BizBen discuss this topic.


Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

First, why keep a sale confidential. If employees know that a business is for sale, they may become distracted or anxious and thereby less productive, look for other jobs, leave, or try to negotiate unreasonable terms to stay.

If landlords find out too soon, they may not be as receptive to lease extensions, renewals, or modifications. If suppliers learn, they may restrict their credit terms, look for alternate customers, raise prices. If competitors become aware of the sale, they may begin to market more aggressively, tell the public to scare customers and prospects into leaving the company for sale. All this eventualities will have a negative impact on the company's sales and profits and that will have a direct negative effect on the final purchase price.

Furthermore, in most cases, a potential buyer will recognize that a non-confidential business listing will adversely impact the business, make it less valuable, and, therefore, they will offer a lower price.

Second, how to keep it confidential. The business needs to be advertised with professionally-written copy that provides enough information to attract interest but not so much as to reveal its identity. Then, it is always best to have a business broker acting as an intermediary to obtain a strict non-disclosure agreement (NDA) and buyer profile to assure that the offering will be kept confidential and that the buyer has the apparent ability to purchase the business.

Only after the broker has received the NDA and profile should the business details be revealed.

Would like to hear what other ProIntermediaries and ProAdvisors think about this topic. Thanks for contributing to my post.

It's not true in every case, but the proposed sale of most businesses should absolutely be kept quiet; revealed only to those who have a legitimate reason to know, such as business brokers and qualified buyers.

A number of business owners who weren't careful about following this advice came to regret their poor judgement. The consequences can be serious to a business once customers, competitors and employees learn about the owner's interest in "getting out of the business." The fact that a business is for sale should not be known by the public until the transaction is complete or almost complete.

One of the best practices of sellers who are careful to avoid unnecessary problems is to qualify buyers as to financial ability and experience relevant to the business, before divulging information about the company being offered.

Another is to require the buyer to sign a NDA (Non-disclosure agreement) before revealing any information about the business, its financial performance and other aspects of its operations.

The smart seller does not include the phone number of the business as the contact method. Either get another phone that can't be traced to you (get a free gmail email account with Googlevoice service activated), or set up an email address (again gmail, etc) that does not identify you and will be used in your online communication with prospective business buyers.

Many great points from others, but another reason why a business is kept confidential is because unfortunately in our industry there are unethical brokers who will actively prospect businesses that are on the market and try to persuade the seller to get rid of their current agent or inquire when the listing period is over. Sometimes I will receive calls from "prospective buyers" on the location of a certain business, and if I feel that they are not truly a buyer, but a broker, I'll demand that they come in and meet me to receive information on the business. If the business is not kept confidential, some buyers will go directly to the seller and try to wheel and deal without the participation of the broker. Like others have stated, the business is kept confidential to protect the interests of all parties, broker, buyer, seller, and employees.

I find that Sellers prefer to keep the possible sale of their business private mostly for their privacy and also credibility issues. In what ever business you are in you have relationships that will be effected by the sale. Employees, Customers and Vendors will all experience some level of uncertainty regarding the sale.

This can sometimes result in reduced productivity, possible problems from competitors that may use this information. Therefor when and how you announce the possible sale should remain in your control, if possible and be well thought out when you do.

Contributor: Business Broker - Preschool Specialist
The reasons for keeping the sale of a business confidential would be the same reasons that you would keep your bank account balance private, or your salary, or your financial statement. But additionally, there are multiple reasons for maintaining confidentiality, before, and after the sale of a business. Depending on the type of business you have, you must be sensitive in the handling of client/customer relations, and letting employees know at the right time about a transfer of ownership is a tricky thing as well.

The fact of a sale is one thing, the financial details are another issue entirely. Most business brokers would tell you to be very cautious in how or to whom you give out information regarding the sale of your business. The asking price, the sales price, and the financials of the business should be kept strictly confidential and you should have anyone looking at your business sign a non-disclosure agreement to help ensure that it remains confidential.

After the sale when the ownership has transferred, the case could be made that the only parties who should have access to the details about what your business sold for could be properly limited to the seller, the buyer, your CPA, and any government agency to which you have to give the information.

I know that might be obvious, but it is said to emphasize just how important confidentiality is.

Contributor: CPA, Due Diligence Services
There are many reasons for keeping a sale confidential. I will try and address what I have found to be the most critical, instead of the most common reasons.

1. If the employees find out that the business is being sold or the owner is even thinking about selling, they start worrying about their job. It does not matter what explanation the owners gives or guarantees promised, the staff figure when management changes they are out. The production staff worries some but the key management positions start looking the minute they find out that a change is in the future. If has happened more than once that the owner feels he has an obligation to tell his top management, when he puts the business into escrow but before escrow closes. The top management leaves, the escrow falls apart and the owner is back running production this time without experience staff to transfer with the business. Experience staff is a business number two asset, with customers being number one.

2. Training and putting into business your future competitor is the other major reason to demand a confidentiality agreement. Buyers sign a Non-Compete Agreement (NDA) before the broker gives the buyer any information at all, but this is not sufficient if you have sensitive trade secrets or a limited amount of key customers. When you find a serious buyer, and you feel that you must turn over more than just financial information, have an experienced transaction attorney draw up a stronger confidentiality agreement. Let me give you some examples I have experienced being a CPA and a Business Broker for over 21 years.

A. A larger company in the same industry pretends to be an interested buyer but they really are looking for everything they can learn about the company so they can steal clients and key management staff.

B. If they find the company is weak they might spread negative stories about the company in order to take it over for close to nothing.

C. The buyer prospect learns the business is doing well, so instead of buying the company, they open up a store front across the street, after learning all the marketing actions the subject company took, and knowing all the expenses of operating that business.

Conclusion

Giving no information out is not a good solution because a prospective buyer needs to get enough information to make an intelligent decision; while on the other hand, too much customer information and trade secret information can get you in hot water. The key is to know what information is sensitive and what is not. This comes from having an experienced broker, a transactional (involved with business sales) CPA and a transactional attorney. The above reasons alone are sufficient grounds to hire an experienced intermediary.

So remember the battle cry of World War II. "Lose lips sink ships."

Contributor: Business Appraisals, Valuations Advisor
There are two good reasons to keep the sale of your business confidential. You don't want your competitors or your employees to know. Your competitors may spread the word that you are going out of business and you should give them your business and your employees will feel very insecure and may even look for new jobs.

Before you even give a potential buyer your business name have him sign a Non Disclosure Agreement which states that the fact of your business being for sale is to be kept confidential.

Also, even after a sale do not make the fact of the business being sold publicly known.

Protecting the interests of the Seller, Seller's employees, Seller's customers, vendors, from Buyers is the main reason.

We employ a variety of measures, it starts with an NDA and can take the form of "anonymous" deal books for our large transactions. We ask for a Buyer's opinion of value "subject to:" further due diligence and verification that all data supplied in the sales prospectus is true and accurate.

This way if a Buyer low-balls the anonymous deal book, "Who cares?" you can move on knowing the Seller's identity and all the other relationships shall be maintained and protected without interference from a goofball Buyer.

Contributor: Business Broker, SF Bay Area
If it became public knowledge that the business is for sale then you can have customers, vendors, and employees get concerned and start to take action that is detrimental to the business. For examples customers could start shopping around for other vendors. Your competitors could actually use that fact to take over some of your customers. Your vendors may start to get very tight about terms and possibly change your terms to COD and some of your key employees may start looking for other employment.

So by the time you are ready to close escrow the business could be very different. The best way to keep the process confidential is to engage a Business Broker. Hence all contact is through the business broker. The broker will have all prospective buyers signed a confidentiality agreement before disclosing any identifying details about the business.

Then during the process you meet at the broker s office or during off-hours so that employees do not become aware of it. If you are trying to sell it directly then as soon as you answer the phone or email, people can figure out which business it is.



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