Steps for Protecting Business Sale Confidentiality

How Non-Disclosure Agreements and Transaction Advisors Can Save a Business Deal

Selling your business is not like selling a home, where spreading the word to more potential buyers can increase the chances of a deal. Confidentiality in a business sale is necessary to protect the sale and maintain business value.

Consider the infamous confidentiality breach during the acquisition of T-Mobile: in the summer of 2014, French asset manager Vincent Le Stradic boarded the train from London to Paris. Deciding to work on the train, Le Stradic laid bare the details of a $15 billion deal in which the mobile provider Iliad would be taking over T-Mobile.

Unbeknownst to Le Stradic, a competitor from another investment banking firm was quietly watching him work. In the next seat over, Alexandre Zaluski was sending the visible information to his colleagues at UBS with the intention to pitch a deal of their own to the client and take the deal from Le Stradic. The details emerged in 2019 under the litigation of a much larger investigation.

This story has become a warning about the potential consequences of leaked business sales. In this article, you’ll learn about ways to protect business sale confidentiality to prevent harmful disclosures.

“Loose Lips Sink Ships”

“How do I keep it quiet?” is one of the most important questions asked by an owner who is contemplating the sale of their business.

The most frequent sources of leaks are family and friends who are considered confidantes. They are often unaware of the negative repercussions of disclosing the intent to sell. The use of social media makes inadvertent slips even easier. If the owner is intent on family and friends knowing about a sale, they must be made aware of the consequences of letting others know. Lawyers, accountants, and advisors, on the other hand, are not likely to tip their hands ahead of time unless they have asked permission, as they are professionals well versed in the sales process.

Who Needs to Know and When?

The answer to this question is critical to maintaining discretion throughout the sale process. Generally speaking, there are two categories of disclosure a seller needs to consider: internal and external.

Internal Disclosure

The Transaction Advisor

Your transaction advisor will be your key partner during the sale process and will be a key contact with any other professional advisors with whom you may choose to engage. You should either be in attendance or have prior knowledge of these discussions. Your transaction advisor will introduce you to their method for maintaining confidentiality. Each situation is unique and will be adapted to your particular circumstances. Your transaction advisor will consider confidentiality mission-critical to the success of the transaction. They will be keenly aware of the damage public knowledge can create in the form of uncertainty and potentially decreased valuation. A transaction advisor without a track record of discretion and maintaining client confidentiality is of no value.

Secure Communications with Advisors

For added protection, you can take the following steps to maintain discretion:

• Create a separate email address used only for communicating with the advisors
• Use a cell phone or separate phone line rather than the office or business line
• Have advisors conduct off-hour or off-site visits
• Restrict staff use or access to the owner’s office — accounting in particular

Employee Non-Disclosure Agreements

If necessary, certain employees can be asked to sign a confidentiality or non-disclosure agreement that requires them to keep any knowledge of a potential sale to themselves. This should be a low-key process intended simply to reinforce the importance of discretion.

External Disclosure

Throughout the sale process, there are four distinct phases where more and more information is disclosed to an external party: information sheet, non-disclosure agreement, confidential information memorandum, and letter of intent.

Information Sheet

The information sheet, or ‘teaser,’ is issued by the transaction advisor to a potential buyer. The teaser is intended to spark interest and a desire to learn more. There aren’t any specifics disclosed in the teaser that would make it obvious who the seller might be. A successful teaser generates a response from an interested party that moves the process to the first stage of disclosure — the non-disclosure agreement.

Non-Disclosure Agreement

The non-disclosure agreement (NDA) may be issued to an interested party without disclosing the name of the business that is for sale. The NDA is usually prepared by the seller’s attorney to ensure confidentiality is properly addressed and the terms and conditions of the non-disclosure are enforceable. Once the NDA is fully executed by the seller and potential buyer, the name of the business is disclosed. The transaction advisor will then inform the potential buyer about the process for moving forward, ensuring that the potential buyer is aware of the proper communication protocol and that limitations on information sharing are clear.

Confidential Information Memorandum

A confidential information memorandum (CIM) provides prospective buyers with sufficient information to generate a non-binding offer. The transaction advisor acts as a middleperson between the seller and the buyer in the CIM exchange process. Typically, the CIM will not include a purchase price, but it will provide enough information for the prospective buyer to appropriately value the acquisition. For this reason, it is extremely important that the CIM clearly articulate all of the company’s attributes. If further information is required following the CIM exchange, the transaction advisor will assess the request and provide the information when appropriate.

Letter of Intent

The due diligence process generally begins with a letter of intent. During this process, the potential buyer will seek to confirm information critical to the health of the business. The potential buyer will review the target’s financial records in detail and will likely visit the business’s premises and speak with staff, customers, and suppliers.

Digital Vaults

The transaction advisor should have access to a digital vault, i.e., an electronic data room, to facilitate the due diligence process by providing protected access to sensitive information like sales, payroll, corporate governance, financial statements, and tax returns. This vault should be well secured with password access limited to the approved parties.

Compartmentalized security clearances should be available for different types of information that allow for limitations on the file types available, such as ‘read-only.’ The vault should have the capability to log and report on access activity and adjust access settings at a whim.

The End Result: A Successful Business Sale

An owner has many things to consider when it comes to business sale confidentiality. The key to that confidentiality is a transaction advisor. The process utilized by the transaction advisor will provide peace of mind to the owner if clearly understood and practiced.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Selecting the Right Valuation Expert
2. Leveraging & Protecting Trade Secrets in the 21st Century
3. Valuation / What’s it Worth? Valuing a Business for Sale

This is an updated version of an article originally published on July 22, 2021. This article was most recently updated by the Financial Poise Editors.]

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