Selling a Business: Confidentiality is Important

Article by Joanne Cassidy

When selling a business, it is important to remember that confidentiality matters.  When customers, creditors, competitors and suppliers learn that a company is “for sale”, things change.  Relationships change, and those changes are usually not good for the business. So, how does a business owner protect the very fact that he is shopping for a buyer?

Confidentiality and Nondisclosure

A good business lawyer will advise the client to take certain precautions to protect confidentiality. This article discusses confidentiality and nondisclosure issues in the context of the sale of a business and suggests ways to protect your company from inappropriate use of your company information.

1. Keep the Potential Sale Confidential

Be very careful about who you tell that you want to find a buyer for the company.  Basically, if someone does not need to know, do not tell him. That includes employees and social contacts as well as other business associates and colleagues.  You will need to tell certain people in your organization, your tax advisor and your business lawyer.  When you do, be sure to impress upon them that the information is not public and ask that they keep the potential sale confidential.

2. Gauge Interest in Purchasing the Company

When deciding who to approach to gauge interest in the sale, contact people you trust first, with the understanding that the information you are about to confide is confidential.  Competitors should always be the last to know.  Go to the top of the organization, to the person who will make the decision of whether to buy the company.  Consider using an intermediary, a business lawyer or business broker to help gauge interest in purchasing the company while keeping your identity confidential.

3. Confidential Information

Protect your confidential information.  The buyer will require certain information to be able to determine whether he wants to purchase the company.  Do not give him access to all information at once.  Offer the bare minimum.  If he is seriously interested, you can give him additional information later, subject to a Confidentiality and Nondisclosure Agreement.

4. Confidentiality and Nondisclosure Agreement

Early in the process, request a Confidentiality and Nondisclosure Agreement.    Your business lawyer should draft the agreement for signature by everyone who will have access to the information. The agreement should obligate all receivers of the information to keep the information confidential to at least the same extent that they protect their own confidential and proprietary information.  It should further provide penalties and remedies in the event a receiving party uses the information for any purpose not specifically related to evaluation of the business in anticipation of purchase or discloses the information to any other party for any reason whatsoever.  Remedies should include injunction, where a court can order someone to keep the information confidential and specific performance, where a court can require a party to do a specific thing.

While none of these strategies guaranties confidentiality of the fact that you are looking for a buyer, they can minimize the chance that the information will become public before you are ready for it to become public.  They can also help protect your company’s proprietary information by imposing penalties which should discourage recipients of information from using or disclosing your information to others.