How to Maintain Confidentiality When Selling Your Business

One of the most troublesome obstacles to selling a business is the issue of confidentiality. But the most challenging issue is not how to keep the project confidential. Rather, it's the challenge of dealing with confidentiality in a way that does not block or severely hinder the owner from finding the right buyer.

The reality is that most businesses with less than $500,000 in annual profit are bought by individuals who already live or work near the business they purchase. But locating individual buyers requires the opportunity be introduced into the community. This does not typically mean the identity of the business is revealed up-front, but once any buyer candidate steps forward, the identity IS disclosed to people in your community. And the reality is that no matter how many pieces of paper a prospective buyer signs promising confidentiality, he or she will probably tell a few people. You know what happens from there.

In my 12 years of managing a firm that consults in the purchase and sale of private companies, I've never seen a business suffer real damage from "the word getting out." I've never seen an employee quit because he or she heard that the ownership of the business might change. I've never seen a vendor or customer cancel an agreement because of a rumor that a business might be selling. But I have seen businesses hindered - and relationships damaged - by an owner's mismanagement of confidentiality issues.

So I've become convinced that the risks inherent in confidentiality are mostly in the business owner's head. It's the fear of the unknown, of people's perceptions changing - perceptions about the business owner himself, not the business. "What will they think?"

The real problem is what the fear does to business owners/sellers. It makes them do things that keep them from reaching their goal - an orderly sale of the business within a reasonable period of time and at a maximum price.

Take, for example, the lumber yard and hardware store in a smallish town in central Kentucky. The business is a size that makes it a natural for individual buyers. It also makes it not very attractive to industry players (i.e., regional multi-location lumber yards and hardware stores) and private equity groups. The owner very much wants to sell and do something different, but his fear of "spreading the word to individuals in his geographic region" is just a concept that he cannot comprehend, a risk he cannot take. After all, the business has been in his family for 50 years.

Did you hear that? His fear is clearly one of admitting to the world that he does not want to own and run this business anymore. Fear of admitting to his employees. Fear of changing how he and his family are perceived. Fear of betrayal.

But the reality is that he has talked to all of his regional competitors and peers in recent years and over time the word has gotten out. Everyone already knows. They've known for years. But despite this reality, the man remains chained to his business and unable to secure his freedom and do what he really wants to do - go back to becoming a teacher and coach.

A very similar story is occurring with a business owner in Alaska. She has a nice business that makes about $300,000 per year in profit. She wishes to sell and do something new but is very concerned about employees and customers "finding out." So although the buyer will almost certainly be an individual who lives or works in the vicinity of the subject business, the seller is searching exclusively among out-of-town peers/competitors - to no avail.

To be sure, out-of-town buyers are a luxury. Word trickles back to the seller's community much more slowly. But the word does trickle back. And if out-of-town buyers aren't good candidates, thus the business does not sell, the business goes unsold for a much longer time than necessary and thereby gives the rumor mill ample time to do its thing.

The lessons?

Lesson 1: Decide whether you really want to sell. If so, get comfortable with it. Get comfortable with letting the world know. Get committed and ready for the change. Of course, don't be cavalier about confidentiality. It IS important and needs to be handled smartly. But don't avoid the logical buyer in an attempt to maintain confidentiality.

Lesson 2: Find out who the most logical buyer type is for your business and go after them. If it's individual buyers, this does not mean you can't talk to industry players or private equity groups. But you should go to all buyer types simultaneously so that your offers will come in close to the same time and you can pick the best of the lot. This is the only way to go.

Again, do I think business sellers should just tell the world that they want to sell? No.

Do I think great care should be taken to maintain confidentiality? Yes.

Do I think that damage can be caused by a failure to effectively manage the sale-related communications and related rumor mill? Yes.

Do I think some business sellers cause more problems than they solve in the way they handle confidentiality? Absolutely.

So before you sell, get a handle on all the confidentiality issues. Sort through the real and the imagined. Then devise and execute a plan that gets you to where you want to be.