Confidential Business Sales
Business sellers are often very concerned with their confidentiality during the sales process. Most sellers of businesses do not want their customers, employees, vendors, or the general public to know that their business is for sale. Such business sellers fear the loss of business or loss of staff because of the uncertainty created from a pending or possible business sale. The need for a confidential business sale requires an experienced and knowledgeable business broker.
A Business Broker Qualifies Buyers Prior to Disclosing Identity of Business
- A business broker must financially qualify all potential buyers (by requesting proof of funds if necessary) and require all potential buyers to sign a comprehensive Non-Disclosure Agreement (NDA) before disclosing the actual identity of the business to a potential buyer.
- Without these safeguards in place, business sellers will have no legal protection in case an unscrupulous buyer attempts to interfere with their business.
- An NDA legally prevents a potential buyer from disrupting the seller’s business and requires that all formal communication be conducted through the intermediary or business broker.
- This prevents a potential buyer from simply showing up announced in the seller’s place of business and openly discussing the sale of the business.
- It also prevents a potential buyer who is also a competitor from attempting to steal the seller’s employees or customers.
- Moreover, a business seller should not have to waste their time with a buyer who does not have the financial means to buy the business.
- One may wonder, however, how a business broker attracts buyers in the first place if the business is not publicly advertised for sale.
- The answer is that professional business brokers employ ‘blind ads‘ that are specifically designed to protect the seller’s actual identity from being discovered.
Confidentiality of Sale During Formal Due Diligence
After a prospective buyer is properly qualified, they should receive the confidential information about the business. At this point, they may choose to eventually make an offer on the business via a proposed Letter of Intent (LOI) or a proposed purchase agreement. If accepted and agreed upon by the seller, the business will be ‘under contract’ and the formal due diligence process commences. The formal due diligence process entails a full and complete investigation of the business by the buyer, including all relevant business and financial documents such as tax returns, bank statements, W2 records, insurance certificates, and licenses. In some instances, a prospective buyer may also wish to meet the company’s employees or vendors.
Interaction with Company Employees Often Problematic
Many sellers will object to a buyer’s request to meet with company employees during the formal due diligence process. While a buyer will sometimes want to meet with company employees in order to ensure they stay on after the sale at the same salary level, doing so will obviously expose the fact that the business is for sale. Thus, the seller’s confidentiality will be breached. The seller then will face the risk that certain employees may quit due to the coming change of ownership. The seller will also face the risk that customers or vendors will also get wind of the fact that the business is for sale.
Negotiate Possible Interaction with Company Employees Ahead of Time
- The sensitive issue of allowing interaction between a buyer and company employees must be negotiated and thought through ahead of time by both parties.
- The buyer must make plain his intentions and desires for interacting with company staff as early in the process as possible – preferably when submitting the Letter of Intent.
- At that point, the seller (with the assistance of the business broker) can properly think through the issue, and decide upon whether and to what extent any employee contact prior to closing will be allowed.
- It is not standard for a buyer to interact with company staff prior to closing, and if desired by the buyer then they must be prepared to make other concessions.
- A buyer should also properly communicate to the seller exactly what he wants to communicate with the company employees and why.
Situation Common in Healthcare Industry
Typically, buyers will only desire to interact with company employees when the business has a very trained and highly knowledgeable staff which can not be easily replaced. This is more common to occur in the healthcare industry or in industries where the employees are licensed individuals who have a following among customers or patients. Physical therapists, for example, are highly trained and licensed healthcare practitioners with a following of patients or referral sources. Buyers of physical therapy practices will therefore often want to communicate directly with the physical therapists on staff in order to ensure that they remain with the business after the sale.
Delay Interaction Between Buyers and Company Employees
In exchange for allowing a buyer interaction with company staff prior to closing, the seller may negotiate that such contact be limited to the very last contingency immediately prior to closing, All other due diligence objectives will have been accomplished by the buyer and a signed purchase agreement will also be in place. Moreover, a seller may wish to require that all or part of the deposit money held in escrow will go ‘hard’ (or be non-refundable) when the buyer interacts with company employees.
Interaction with Vendors Also Problematic Prior to Closing
Most business sellers will similarly wish to prevent any contact between a buyer and company vendors (or suppliers) prior to closing. The seller will want to maintain their current vendor-relations and prevent a climate of uncertainty from being created. In some cases, a buyer will want to meet with vendors in order to see if they will qualify for the same payment terms that the seller is receiving. Most vendors, however, will not provide this answer until the buyer is the actual owner of the business. Although a seller normally will have an obligation to assist a buyer in establishing or maintaining vendor relationships, it is generally a task to be accomplished after the closing occurs.
A seller of a business has every right to ensure the confidentiality of the sale of their business. If this need for confidentiality comes into conflict with a buyer’s desire to conduct due diligence, then the business broker must ensure that all possible negotiations and compromises are properly explored.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.