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? Should I tell my workers that I am selling?
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 more of an upset in the future.
It is appropriate to inform the key people who will participate in the process that the company is for sale, by supplying them with information (usually the CFO) and asking them to keep it secret through a confidentiality agreement. With this transparency and gesture of trust, you avoid suspicions arising when asking them for information, reducing the likelihood they mention it to their colleagues. Normally, 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 known as a Non-Disclosure Agreement (NDA). Previously, potential buyers who have been qualified to carry out the transaction, having a strategic fit 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, when we deal with potential buyers, we only do so with large international groups with professional teams specialized in corporate transactions that are very clear on the importance of confidentiality.
Compliance with the NDA implies the non-disclosure of the information received (transmitted and perceived by observation). You should bear in mind that maintaining confidentiality is an essential tool, especially nowadays, due to the role played by new technologies making 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.
But what happens if the information is leaked?
Transaction price variation: How many times have we seen how a rumour in the market can change the price of a share, in one sense or another, brushing aside the initial, defined strategy and sometimes even forcing the parties to abandon the closing of the deal.
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 disastrous for 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 businessowners, to a certain extent, and we guarantee that they do not leave you by surprise before the deal is finalized.
Confusion in the workforce: From the beginning, rumours of a new shareholder can generate nervousness among employees, directly affecting 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 be able to continue to count on the company’s products and services under the same conditions, or 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 to 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, because you cannot expect two advisers to compete to find a buyer and at the same time do it confidentially.
Managing confidentiality during a purchase and sale 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. In our work as advisors in corporate transactions, we usually send potential clients a confidentiality agreement in which we undertake not to disclose any of the information provided to us regardless of the subsequent signing or not of a mandate (advisory contract).
If you are considering the sale of your company and are contacting different advisers, do not hesitate to request this confidentiality agreement to safeguard your sensitive information and the 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 they reach, 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.
It is possible to utilise 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: This document is designed to protect the company’s identity from being revealed when presented to potential investors. The teaser reveals the company’s status, but not its name. If buyers show interest, a confidentiality agreement is signed 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 (LoI): This 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: whether the transaction involves a capital increase, purchase of assets and liabilities (and which assets and liabilities, if any). This text should also include information about shares, the price, the percentage to buy, the methods of payment that you will use, the payment deadlines, price adjustment formulas and 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.
- Data Room: If a deal has reached the point where a Data Room needs to be created, it means that we are close to closing the deal. In other words, we are at a sensitive point where confidentiality is vital. That is 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, to proceed with the transaction. Information delivery is done through online software that prevents printing the contained documentation, avoiding uncontrolled data leaks.
What is the Virtual Data Room?
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 move forward with the process. This information transaction is extremely sensitive and should only be done when there is a reliable and trusting relationship between both parties, which means that there is already a willingness to invest and close a transaction.
This information transaction is carried out through a software designed to avoid any revelation of documents and to keep all the uploaded documents safe. 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 are known for transparency, confidentiality, and professionalism with how we handle our clients’ transactions. 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.