Business Sales Are Confidential
Unlike real estate transactions, business sales are confidential in nature. This means that the actual identity of the business is kept confidential from the public, and all prospective buyers of the business must complete a Non-Disclosure Agreement (NDA) and financially qualify themselves prior to obtaining the confidential information about the business (including the identity of the business). By agreeing to the terms of the NDA, the buyer agrees not to contact the seller directly without the express permission of the business broker and the seller.
Direct Communication Must Protect Deal’s Confidentiality
Once a buyer receives the confidential information about a business for sale, they often want to meet the seller and talk about the business. The buyer will often tour the business and then discuss the business directly with the seller (and the business broker). This type of direct communion between a buyer and seller should be limited and only at the express consent of the seller. Because the deal is not yet ‘under contract’, the buyer and seller should never meet or talk directly. Any discussion between the buyer and seller in the preliminary stages of a deal – before the deal is under contract – must be conducted through the business broker.
No Direct Communication Until Deal is ‘Under Contract
- As a general rule of thumb, it is never wise for a buyer and a seller of a business to directly communicate without the presence of the business broker until the deal is ‘under contract.’
- A deal goes ‘under contract’ only when there is a signed and agreed upon Letter of Intent (LOI) or purchase agreement.
- Typically the buyer will pay a refundable deposit when an LOI or purchase agreement is in place.
- Importantly, by putting the business ‘under contract’, a buyer gains a certain period of exclusivity during which time the seller may not accept other offers.
- Until this happens, there is nothing binding the buyer or the seller to the deal, and the seller has no way of knowing if the buyer is truly serious.
- All communication should thus flow through the business broker as a buffer to protect the seller’s valuable time and resources.
- Part of the seller’s benefits of having a business broker is not having to expend valuable time and resources dealing directly with potential buyers.
- Many sellers have limited time and patience with buyers who do not show they are serious by making an offer and agreeing to pay a deposit in order to gain exclusivity over the business.
- Meetings between qualified buyers and sellers prior to a deal going ‘under contract’ is perfectly acceptable so long as the business broker is present.
Direct Communication After Deal is ‘Under Contract’
After a deal goes ‘under contract,’ direct communication between the buyer and seller without the presence of the broker frequently occurs. Many times buyers will have questions that only the seller can answer, and it is beneficial to the deal for the buyer and seller to independently establish rapport. The business broker must ensure, however, that the direct communication occurs in a controlled manner. It must be explained to the buyer that such communication should be done in a manner that protects the confidentiality of the business sale. Constructive communication should be encouraged so that both party’s goals and desires are taken into account.
Example of Direct Communication
- Let us assume that Barry the Buyer is buying Suzie the Seller’s beauty salon.
- Barry and Suzie have a signed LOI (with a refundable deposit from Barry) and Barry is conducting formal due diligence on the salon in preparation to close within thirty days.
- The deal is thus ‘under contract’ and Suzie has told her business broker that Barry may text or phone her directly with any questions.
- As a part of his formal due diligence process, Barry has some questions about Susie’s willingness to stay after the sale in order to ensure a smooth transition.
- Barry calls Suzie and tells her that he has concerns about whether the salon’s employees would be willing to stay and work for him after Suzie leaves.
- Suzie explains certain concerns that some employees may have about a change of ownership, and how best to circumvent such concerns by cooperating after the closing.
- Suzie suggests to Barry that they should sit down with each employee after the sale to ensure them that their compensation packages will not be changed.
- Suzie emphasizes to Barry that the staff will need direct reassurance from him that he will value them and their services in the salon.
- Suzie also tells Barry that she herself will stay after the sale as a working stylist for several months in order to maintain a sense of stability for the employees and clientele.
- Barry is assured that the transition will go smoothly which helps him successfully complete his formal due diligence process.
- It is crucial that the business broker facilitates such direct communication so that the buyer and seller themselves may work out such issues in a cooperative way.
Most Business Transactions Require Trust Between Buyer and Seller
In most business transactions, trust is a crucial component of a buyer’s decision-making process. The buyer will need to trust that the seller is conveying accurate information about the business, and that the seller will help the buyer after the sale to ensure a smooth transition. Direct and uninhibited communication is often the best way to establish such trust and therefore a successful business transaction.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.