Confidentiality. This is perhaps one of the first words spoken in a conversation between an entrepreneur who has decided to sell their company and those to whom the decision is revealed, including the advisors in the transaction process. You are not wrong to demand confidentiality, as this is key to the success of the operation.
Throughout this article, we will explain why confidentiality is essential, the role it plays at each stage of the process, and how to enforce it.
Why is confidentiality necessary during the whole sale process?
Confidentiality: with whom and to what extent?
Confidentiality is undoubtedly the cornerstone of any company purchase or sale transaction. Therefore, in any corporate operation, the confidentiality agreement (NDA) must start from the first moment, even when the entrepreneur has the idea in their head but has not yet decided to carry it out. If you follow this recommendation now, you will save yourself from upset in the future.
You must inform certain staff members of the sale, as they will be part of the sales process. A few key members must have the information, usually the CFO; but remember to do it intelligently. You must make sure they keep the transaction secret by having them sign a confidentiality agreement when you tell them.
With this transparency and gesture of trust, you avoid suspicions arising when asking them for information. You will also reduce the possibility of them mentioning it to their colleagues. Usually, they will repay the trust you have shown them. It would be best if you did not discuss it with anyone else.
Confidentiality allows the parties involved (advisors, buyers, sellers, etc.) to share information in the transaction without any external agent discovering it.
The mechanism that guarantees confidentiality in this type of operation is the Non-Disclosure Agreement (NDA). Previously, potential buyers who have been qualified to carry out the transaction, have a strategic plan and sufficient resources, have been provided with a blind profile, and have shown interest in moving forward with the potential purchase.
At ONEtoONE Corporate Finance, we only deal with large international groups when dealing with potential buyers. They have professional teams specialized in corporate transactions that are very clear about the importance of confidentiality.
Compliance with the NDA implies the non-disclosure of the information received (transmitted and perceived by observation). Confidentiality is an essential tool, especially nowadays. Be careful: new technologies make information much more accessible and immediate.
The signing of an NDA obliges the parties to monitor compliance with a series of obligations concerning the information transmitted, not only at present but also in the future. Non-compliance by any one of the parties can negatively affect the operation’s development and closure.
Risks of information leaks
But what happens if the information is leaked?
Transaction price variation
It is not uncommon for a market rumor to change the price of a stock. This leakage of information can overturn the initial strategy defined. On some occasions, both parties have even had to abandon the closure of the transaction.
The exit of key professionals from the organization
The management team and key people in an organizational structure may feel threatened by the proposed transaction long before the new partners arrive and explain their new intentions. Losing these professionals can be detrimental to the operation, as the buyer may back out or lower the price due to the loss of value implied by the loss of key people for the company.
«It would be best if you put in place means to prevent managers from leaving during the negotiation phases.»
One measure we have applied on occasion with the business owner has been to inform critical managers of the idea of a sale in two years and reward them with a percentage of the transaction’s value, encouraging them to work together to improve financial ratios during this period.
Other times, we define a price that we consider reasonable with the employer and indicate to the managers that they will receive a percentage of the increase on that price. Therefore, they see a clear benefit in making a significant effort for the company, since they become business owners, to a certain extent, and we guarantee that they do not leave you by surprise before closing the deal.
Confusion in the workforce
From the beginning, rumors of a new shareholder can generate nervousness among employees. This can affect their work performance and, therefore, the company’s financial results.
Concerns of customers, suppliers
News of a new shareholder situation may cause uncertainty for customers, as they do not know whether they will still be able to continue to depend on the company’s products and services, as well as for suppliers, as they do not know whether they will be able to rely on the approval of the new owners.
Without M&A advisors, it is tough to maintain confidentiality and carry out a rigorous search process for the best buyer. If you do not give exclusivity as advisors to a firm specializing in companies’ sales, do not expect confidentiality either. You cannot expect two advisors to compete to find a buyer and simultaneously do it confidentially.
Managing confidentiality during an M&A transaction
Managing confidentiality is a crucial aspect of a transaction of this type. The first people to be required to maintain confidentiality are the advisors themselves. Even before signing a mandate with them to sell your company.
It is standard practice for advisors to send a confidentiality agreement to potential clients. In it, they commit themselves not to disclose any of the information provided, regardless of whether or not they subsequently sign an advisory contract.
If you are considering the sale of your company and are contacting different advisors, do not hesitate to request this confidentiality agreement to safeguard your sensitive information and future operation.
Focusing on the buying and selling process, sellers usually look for higher confidentiality levels, but this depends on many factors and can vary.
For example, if the seller wants a high level of confidentiality, they must reduce the number of potential buyers reached, which will slow down the sales process.
On the other hand, if the seller is looking for faster results, they must broaden the potential buyers’ selection, making it more difficult to control the confidentiality factor. This may seem like a conflicting contradiction to any seller.
Strategies to guarantee confidentiality
It is possible to use different techniques during the buying and selling process to increase confidentiality, but many business owners are not even aware of them. Here are some of these techniques:
The creation of a Blind Teaser
The Blind Teaser is a document designed to protect the company’s identity from being revealed upon presentation to potential investors. The teaser reveals the company’s status, but not its name. The buyers who show interest must sign a confidentiality agreement to protect their identity.
The signing of an NDA
Confidentiality is crucial from the first day. There will be many agents involved in the process. Everyone exposed to this information must sign an NDA so that the idea and intent are protected and secure.
Letter of Intent
The Letter of Intent (LoI) is a document in which the buyer and seller put in writing the main points of the agreement they have reached. This text must include all relevant details:
- Type of transaction: capital raise, purchase of assets and liabilities (and which assets and liabilities), or shares.
- The price.
- The percentage of the company acquired.
- The methods of payment.
- Payment terms and deadlines.
- Price adjustment formulas.
- Other types of remuneration.
The confidentiality of the agreement and a period of exclusivity (in which the seller cannot negotiate with other buyers) are also agreed upon while the Due diligence and the purchase and sale contract are being developed.
Virtual Data Room
If a deal has reached the point where is necessary to create a Data Room, it means that we are close to closing the deal. In other words, we are at a sensitive point where confidentiality is vital. Hence why the Data Room is designed to protect the information. They create a virtual space where the seller will hand over all the necessary documentation to the potential buyer in order to proceed with the transaction. Information delivery is done through online software that prevents printing of the contained documentation, avoiding uncontrolled data leaks.
How does the Virtual Data Room contribute to confidentiality during the sale process?
A Virtual Data Room (VDR) is a virtual space where the seller uploads all the necessary company documentation so that the buyer can have access to it and progress with the process.
This information transaction is extremely sensitive. It should only occur when both parties have reached a reliable and trusting relationship. At this point, the willingness of both parties to invest and close a transaction is implicit.
This information transaction is carried out through software designed to avoid any revelation of documents and to maintain the safety of uploaded documents. The software must be a high-quality product that provides confidence, security, and safety to both parties involved in the operation.
Imagine how difficult it could be for a business owner to expose the essence of his company. Aside from the emotional factors that make this operation difficult, this part of the process must meet all the requirements to guarantee security and peace of mind between the parties.
At ONEtoONE, we handle our clients’ transactions with transparency, confidentiality, and professionalism. One of our best allies is the trust we generate through our work. Therefore, we encourage you to contact us if you are looking for advice on your company’s sale/purchase. And remember, confidentiality is the key to success.