Confidentiality Breach and Employee Suspicion
In the last issue (#87) we discussed the obstacle: Bad Timing - Waiting too Long to Sell. In this issue we will explore another obstacle: Confidentiality Breach and Employee Suspicion.
A Favorite Famous Quote
"There are some people who, if they don't already know,
you can't tell 'em." Yogi Berra
Confidentiality Breach and Employee Suspicion
Maintaining confidentiality in the process of selling your business is absolutely critical. Although there are numerous overwhelming reasons to use a professional intermediary when selling your business, confidentiality would be very near the top.
||If you try to sell the business yourself, it is almost impossible to maintain confidentiality. Experienced brokers know how to control confidentiality.
A breach of confidentiality can have significant negative impact on your employees, customers, suppliers, competitors, lenders and buyers
Employees have a fear of the unknown (the prospective buyer). If they learn of a potential sale, they may begin looking for another job. Even worse, they may contact a competitor to inquire about job openings and inadvertently mention the sale of your business as their reason for looking elsewhere!
If competitors hear rumors of a possible sale of your business, they will not hesitate to add fuel to the fire. You can fully expect them to be more aggressive in attempts to poach your customers and you shouldn't be surprised if they mention the rumored sale in the process of talking with your clientele.
Customers who hear rumors also fear the unknown aspect of dealing with a new owner. Will a new owner raise prices? Will a new owner maintain quality? Just in case, as a back-up, customers may try your competitors. Who's to say if you, or your prospective buyer, can keep a customer long term if that occurs?
Vendors, suppliers and lenders who hear rumors may get nervous and wonder why you are selling. They may fear you are having financial difficulties and tighten your credit terms. For instance, maybe some suppliers allowed you 45-60 days to pay your invoices. In response to rumors they may demand cash on delivery, or a strict 15-30 day payment policy. Lenders may consider calling in a note on a minor technicality.
Buyers and their advisors become very concerned about confidentiality breaches
Buyers know they must maintain good relationships with employees, customers and suppliers. If things begin to deteriorate before a transaction closes, it may never close. A breach of confidentiality is not a big deal breaker, it's a huge one! And the business value can plummet quickly once a breach has occurred. And it may be difficult to recover.
Professional intermediaries know how to control confidentiality through "blind" advertising, prescreening of buyers for qualifications before releasing information, obtaining confidentiality and/or non-disclosure agreements from prospective buyers and releasing confidential information in phases as the sale process progresses.
Don't be your own worst enemy by creating your own breach of confidentiality
Sellers frequently create their own confidentiality issues. The business world is often a very small one, and anyone you tell without stressing the absolute importance of confidentiality may mention it to someone else. Voila! Pretty soon, an employee enters your office and asks if you are selling your business!
It is best not to tell anyone, other than your spouse, CPA and attorney, that you are selling your business. But, even with them you must stress the importance of confidentiality. Try not to tell your best friend, your children, siblings, or your parents. If you must, you need to absolutely stress the importance of confidentiality and scare the heck out of them! It really is that critical.
As strongly worded as the previous paragraph is, by now you realize you should not tell your employees. However, handling employees requires extra caution. When the broker or buyer are to visit your facility, it's best accomplished after hours when employees are not present. If a visit does occur while employees are present, have a rock-solid story that all parties are aware of.
Some buyers will demand to talk with employees as part of due diligence. It's worth fighting to see if you can convince the buyer that it cannot happen. There is never 100% assurance a transaction will close, and in most instances you can persuade a buyer to forego that aspect of due diligence. If you have to give in, the buyer/employee meeting should not occur until almost all other contingencies to closing have been resolved.
Once you have made the decision to sell, always be prepared to handle the question "Are you selling your business?" It may come unexpectedly from an employee, a customer, supplier, etc. You should expect it - it is likely to happen at some point. The best way to handle such an inquiry is with humor, such as, "Everything's for sale for a price. Are you interested at $5,000,000, and did you bring your checkbook?”