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.
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."