Keeping it Confidential
by Glen Cooper, CBA
Confidentiality is usually critical to the business selling process.
But, there are three questions you, as a seller, need to ask: Is confidentiality really important to the sale of my business? If it is important, what steps do I need to take? And, what should I say if somebody asks me if my business is for sale?
Confidentiality is important for a variety of reasons. Customers, competitors, employees and creditors all will have different reactions to finding out that your business is for sale. Buyer prospects themselves often react negatively to a business opportunity that has not been kept confidential.
Business brokers usually follow four steps to protect a seller's confidentiality. If you are using a broker, make sure that these four steps are being taken. If you are selling the business without a broker, you may want to follow one or more of these steps yourself.
You also need to rehearse how you will respond if ambushed by surprise. You may get asked about your business sale when you least expect it.
Why Worry About It?
As a seller, you may not want your employees, customers, competitors and creditors to know that your business is for sale. Employees, fearing the unknown, may quit. Customers, fearing a decline in performance, may switch. Competitors may spread rumors. Creditors may get nervous. For your business, a breach of confidentiality may spell disaster because any one or more of these reactions can happen.
Some of these fears may be blown out of proportion. Employees usually don't quit. Most customers will remain loyal. Competitors and creditors often pay no attention. For some businesses, it really doesn't seem to matter, especially if the seller anticipates a short selling period.
But, even if confidentiality doesn't seem important in the short run, at least one major problem may arise when the business remains on the market for an extended period. If your business is known to be for sale for too long, it may appear to be 'shopworn merchandise' to buyer prospects. This drives the price down. It may even make your business impossible to sell.
You, as a seller, are the best judge of whether or not confidentiality matters. In most cases, you are going to decide that it is critically important. It is almost always better to limit the spread of your company information.
If, in fact, you do decide that you want maximum confidentiality, here are the four steps most brokers take to ensure maximum confidentiality for their clients. If you are selling the business yourself, you may want to copy them for your own action plan.
Step 1: Prepare Blind Ads and Listings
'Blind' ads and listings are used by almost all business brokers. However, writing effective blind ads and listings is difficult. An ad or listing that's too general won't get a good response.
A 'blind ad' is an advertisement that camouflages the identity of the business in some way. A 'blind listing' is a camouflaged description of the business in a multiple listing database.
The goal of any business opportunity ad is to attract buyer prospects. When the identity of the business has to be guarded, though, an ad has to be cautiously worded. When this happens, the ad may lose its effectiveness. The less specific it is, the more it looks like every other ad.
"Manufacturer for Sale. Call Broker. 555-1212" will get a minimal response. Describing the business for sale as a "Manufacturer of low-tech product" will get a better response. "Manufacturer of low-tech product in high-tech market" will get the best response. Adding details to an ad usually improves response.
The more details you add, however, the more you risk breaching your own confidentiality. Remember that there may be competitors and employees reading your ad. They can be pretty creative in assembling information from different sources! This is especially true if they already suspect something.
More troublesome than small ads are the longer descriptive listings that one can now place on the Internet. There are several multiple listing services which accept listing placements by brokers and sellers. To be competitive in this environment, you may feel the need to write as many as 500 words about the business for sale! Writing that much copy without identifying the business is much harder than ad writing. But, the same rules that apply to ads apply to these longer listings.
A business broker has a big advantage here. The business broker usually has many businesses for sale which attract buyer prospects. Buyer prospects respond strongly to ads which indicate that the broker has a wide variety of business opportunities, even if the individual business descriptions are vaguely worded. The broker can then mix and match buyer prospects and listings.
The broker may also have more than one like-kind business for sale, further helping to mask the specific identity of any particular business. If a broker advertises five manufacturers, for example, buyers will call on the ad anyway even though no more information is provided. The fact that the broker has five such opportunities is sufficiently compelling to get the desired response.
Step 2: Pre-Qualify Buyer Prospects
Screening and pre-qualifying buyer prospects is perhaps the business broker's most valuable service to protect seller confidentiality. Make sure this is done in your business selling process.
Business brokerage industry statistics indicate that over 90% of buyer prospects who call on business-for-sale ads are unqualified for some reason. They lack the necessary money, skills or courage to move forward. The successful business broker survives by mastering qualifying and screening techniques!
Establish a process of screening and pre-qualifying prospects before the first ad appears.
Neither brokers nor sellers can afford to spend time answering detailed questions posed by these often well-intentioned, but nevertheless unqualified, 'tire-kickers.' If you are selling without a broker, don't forget to establish a separate phone service, e-mail or postal address to receive inquiries. You don't even want to think about handling buyer responses without a buffer between you and the unqualified tire-kicker.
Prepare a form to record information about the buyer prospects as each contact is made. Prepare a short 'script' to answer the questions you anticipate without giving away the identity of your business. It will take some experience before you know what questions buyer prospects will ask. Also give some thought to what type of buyer you want. How much cash do they need to buy your business? What minimum skills and background must they have? How are you going to ask for, and collect, this information?
When the buyer prospect contacts you, establish rapport by setting up a fair exchange: an answer-for-answer trade off. For example, get the name and contact information of each prospect in return for giving them your personal name. When they ask, "What's for sale?", tell them it's a business that requires at least $XX,XXX dollars cash down. With assurance that the prospect has this type of cash reserve, you might then give them more details about the type and general location of the business. Keep trading information until you get enough in return to decide whether or not this prospect meets your minimum criteria for further contact and qualification.
Anticipate at least a 50% drop-out rate after this first stage. 50% of the callers to brokerage offices don't allow themselves to be qualified. Our follow-up research over the years indicates that these people are best left un-pursued. If a buyer prospect isn't open and forthcoming upon first contact, that prospect is usually unqualified. They don't have the money; they don't have enough experience; they are your competitors looking for information; they are hopelessly naïve about business-buying disclosure requirements; or they are just difficult people. In any case, you don't need them.
Step 3: Register Buyer Prospects
Brokers require buyer prospects to provide background information about themselves and to sign a confidentiality (or non-disclosure) agreement. This is a reasonable and fair request.
In our office, we require each individual buyer prospect to complete a one-page "Buyer Registration Form" and to sign a one-page 390-word confidentiality agreement. We have a separate form for corporations, partnerships and groups. Most serious buyer prospects will complete the form and sign the agreement without a single word change. We send these by mail, fax or e-mail and we accept them back in any of these three ways.
Our simple form asks for the buyer prospect's contact information, acquisition criteria, and financial disclosure of cash available for the business purchase. We also ask for a resume and financial statement from individual buyer prospects, and other relevant types of financially qualifying information (like annual reports) from companies and buy-out groups.
We usually conclude that prospective buyers are unqualified if they don't register. But, if a buyer prospect objects for a reason we find credible, we require at least some type of third-party reference (like a local bank reference) to proceed with any disclosure or discussions.
It can be tempting to relax buyer prospect qualification requirements. Both brokers and sellers are naturally enthusiastic about new prospects. It is always exciting to have the phone ring. This feeling is even more intense if there hasn't been much response to the marketing effort, or if a negotiation has just fallen though and the seller is 'on the rebound.'
A sincerely interested and qualified prospective buyer will almost always be courteous, understanding and compliant with a registration and pre-qualification process that is fair and reasonable. It is critical, even at the level of the smallest business, that you know who is trying to buy your company.
Step 4: Release Information in Phases
The job of protecting confidentiality gets tougher when the pre-qualified and registered buyer prospect begins to get detailed company information. Releasing this information in stages is the way skilled brokers manage this process.
Don't create a package or report that gives the buyer prospect a complete and detailed 'information download' on the business. Instead, plan a phased release of financial and proprietary information as buyer sincerity and trustworthiness is perceived during the stages of negotiation.
When we list a business, we create an "Offering Summary" which contains an executive summary sheet (a single page, suitable for faxing), a narrative section, a financial section, and a section of reprints, technical disclosures and other relevant materials.
The narrative consists of only a few paragraphs on each of about four topics: 1) the business description and history, 2) the market demand, competition, location and reason for selling, 3) the company management, personnel and organizational structure, and 4) the tangible and intangible assets for sale.
The financial section consists of an introduction, a spreadsheet of historic income statements, and footnotes which explain income and expense items. For larger businesses, it is also appropriate to include a spreadsheet of historical balance sheets.
Buyer prospects who register get a return phone call. If they're interested after hearing some basic facts about the business, they receive our "Offering Summary." Only after a buyer prospect registers, is pre-qualified, hears about the business in a phone call and receives and reads our package, does he/she get an opportunity to meet with the seller.
At the first meeting with the seller, the buyer usually asks specific questions. After this first meeting, we provide more information, as approved by the seller. We work with the seller to prepare answers to the questions as a follow-up to the meeting. We discipline ourselves to answer only those questions asked. We also begin to ask the buyer prospect to make an offer subject to further 'due diligence.'
We never allow our seller client to disclose sensitive business information until an acceptable offer is made in writing by a registered and pre-qualified buyer prospect. Even then, we continue to advise a 'go slow' policy of gradual information release all the way to a closing.
It is never in your interest as a seller to release information that hasn't been requested. It is always wise to insist upon an acceptable offer before disclosing any business information that you consider proprietary.
Practice Your Response
Even with the most careful handling, however, rumors are unavoidable. Even a business owner whose business is not for sale may be approached by people asking if the rumor is true that their business is for sale!
To handle this situation, you must decide how to muffle the business-for-sale buzz even if you have taken the precaution of listing with a competent business broker. Even when no one has breached confidentiality, the subject of the business-for-sale may still come up.
When you least expect it, someone will ask, "Is your business for sale?" Or, they will tell you that they heard that it is!
To respond to the business-for-sale question or comment, you need to anticipate the question so that the elements of surprise and panic don't cross your face. This may take some practice.
Prepare and practice a truthful answer in advance so it appears to be spontaneous. Even if you don't regard "little white lies" as morally wrong, you would do well to avoid answers which have the potential to create future problems.
One good response is to confirm that buyers have approached you over the years and that such informal discussions often cause the outbreak of rumors. Another approach is to laugh it off with the "everything's for sale at a price" comment.
The best response we've witnessed over the years is a combination response. A good combination response might be: "Sure, I'll always talk to someone who wants to buy me out! Did you bring your checkbook?!"
 About the Author
Glen Cooper, CBA, is a Certified Business Appraiser and is President of Maine Business Brokers' Network in Portland, Maine. He has been a full-time business broker and business appraiser for eighteen years. Email your comments to Glen or, visit his web site.
This article is © Copyright 1998-2000 by Glen Cooper and may not be reproduced in any format without the express written permission of the author.
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