If you’ve ever browsed business-for-sale listings, you’ve probably noticed that most small businesses up for sale keep their identities concealed. It’s not uncommon to come across listings with vague locations like “Orange County, CA.” But why do business owners choose to keep their sale confidential?
When selling a small business, maintaining confidentiality is a common practice. Publicly announcing your intention to sell can lead to various issues with customers, employees, and partners. These issues can, in turn, devalue your business. Let’s delve into why confidentiality matters in the sale of a business.
Customer Reactions
Imagine walking into your favorite local pizza place, and the owner informs you that they plan to sell the business. How would you react?
You might worry that the quality of the pizza will decline or that the service will suffer. You might even fear that the sale won’t go through, and the beloved pizza joint will close its doors.
In reality, the owner’s disclosure doesn’t benefit you as a customer. It’s merely a plan, and sharing it prematurely can do more harm than good. Revealing plans to sell a small business to customers can drive them away, resulting in a loss of revenue that can reduce the overall value of your business.
It’s advisable to keep the sale of your business confidential from customers until the transaction is finalized and ready to be announced.
Employee Reactions
Now, put yourself in the shoes of an employee attending a weekly staff meeting where the owner announces plans to sell the business. How would you react?
You might fear that the new owner will downsize the workforce or bring in a new manager who could hinder your career growth. You might be concerned about delayed raises or other uncertainties.
In practice, this kind of announcement can lead employees to start looking for new job opportunities, negotiate for higher pay, or become less engaged at work due to uncertainty. The owner’s decision to reveal their plans can create unnecessary worry and concern among employees.
Disclosing plans to sell a small business to all employees can often do more harm than good. It’s advisable to keep the sale confidential from employees, except in two specific scenarios:
- When there are key employees that the buyers need to meet. In this case, it’s recommended to reserve this step of due diligence until the very end and frame it as meeting a potential new partner in the business.
- When you want to involve a select few employees who might be interested in purchasing the business. In this case, confidentiality should still be maintained, and a competitive process should be conducted.
Partner Reactions
Consider the perspective of a landlord who learns that the business tenant plans to sell. How might they react?
The landlord may worry about the business not selling, leading to a vacant property. They might consider increasing the rent to maximize income or share the information with other business owners in the area.
In these scenarios, the landlord can quickly transition from being a business partner to a potential risk or even an adversary in the sale. To avoid such situations, it’s wise to extend your lease with at least 36 months remaining before initiating a sale process. This prevents early negotiations with the landlord.
Maintaining Buyer Confidentiality
So, if disclosing your intention to sell to customers, employees, and partners is discouraged, how can you ensure that prospective buyers keep the sale confidential?
Here are three effective methods:
- Vague Marketing Materials: Keep public marketing materials vague about the business’s identity. Provide enough information for buyers to assess if the business aligns with their goals and skills, but not enough to identify it.
- Confidentiality Agreements: Require all potential buyers to sign a confidentiality agreement before disclosing any confidential information. This legal document stipulates that buyers must keep the information confidential for a specified period, typically 3-5 years.
- Honest Communication: Be candid with buyers about the importance of confidentiality. Most buyers are reasonable individuals with a passion for entrepreneurship and small businesses. By explaining the consequences of breaching confidentiality, you can emphasize why it matters.
While there will be a suitable time to announce the deal, it’s essential not to rush it. After coming this far, you owe it to yourself, your employees, and your customers to finish the sale process securely and successfully. Confidentiality is key to a smooth and profitable business sale.
