The Importance of Confidentiality When Selling Your Business

A brilliant client came to me a few years ago. She had a doctorate in astrophysics and had built an innovative health IT company. She wanted to sell her company and wanted to do it quickly and inexpensively. So, she picked up the phone and talked to the owners of three other competitors in her field that she knew would have a strategic interest in buying her company.

What was the result?

Not only did the other companies tell everyone inside the industry that she was eager to sell, but they poached her key employees and provided her with offers—letters of intent—at pennies on the dollar of what her company was worth.

Two years had passed by the time she came to me. The contracts coming into her company had declined, the strength of her employee base had weakened, and she now had far fewer options in terms of selling her company.

She has been her own worst enemy.

Most owners know intuitively that confidentiality is crucial to a successful sale. At the same time, it is not possible to market or sell anything—including your firm—without talking to people.

An M&A advisor uses several tools and processes to protect your confidentiality. It is best described as a “gating” process. The seller and buyer open one gate at a time and the next gate isn’t opened until both parties agree. Information is only shared that is appropriate for each gate.

A “blind teaser” provides high-level information about a company for sale without identifying the company’s name. It’s important that this blind teaser doesn’t give away the true identity of the company. For example, if you were to copy information in the teaser and put it into Google, the name of the company should not come up. A blind teaser should be high-level enough to help a potential buyer determine if they have an interest.

After receiving the blind teaser, some potential buyers will indicate interest in learning more. They will not be replying to you. They will be contacting the M&A advisor, who they know represents a plethora of sellers.

Before giving out any further information, the M&A advisor should share with you the identity of any potential buyers interested in receiving more information. You may know the potential buyer and see them as a direct competitor or an unworthy successor to your company.

If you are ready to move ahead, your M&A advisor will have the prospective buyer or buyers sign a non-disclosure agreement, or NDA. As M&A advisors, we have potential buyers sign an NDA with us on behalf of our client. The potential buyer only learns of the name of the selling company after the NDA is signed.

Without an M&A advisor, the document may be directly between the buyer and seller. In that instance, the buyer can learn the identity of the seller without signing an NDA. This is a mistake and would ultimately leave the seller exposed.

After the NDA is signed, a third document called a confidential information memorandum (CIM), comes into play. This is a standard document that provides more information about the seller, including the identity of the seller and some high-level information, but not important competitive information.

This is an initial, but not total, reveal of top-level information about your business.

A good M&A advisor knows how to manage the information flow and not give away too many facts too easily during this stage. This is an individualized process that takes some discernment and judgment.

When you sell a house, an important financial asset that also has emotional value to you, you can put a big for sale sign out front, along with print advertisements and digital listings. The idea is to tell as many people as possible so that all the potential buyers will vie for your home, allowing you to get the best price.

Selling your company is a lot more complicated than selling a home.

Business owners who market their companies themselves forfeit confidentiality and feed the rumor mill. This makes you and your company vulnerable. As the owner of your company, you owe it to yourself to keep the sale confidential, meaning you only take into your confidence those who truly need to know.

Using an M&A advisor to guide you through the process—from search to sale—will help ensure the best outcome for you and your business.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.