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Loose Lips: How to Maintain Confidentiality When Pursuing a Deal

The Anatomy of a Deal Newsletter

Smart Summary

  • Breaches of confidentiality can affect relationships with a seller’s employees, customers, vendors, other business partners and, of course, the buyer.
  • A carefully crafted and robust non-disclosure agreement (NDA), along with a staged sharing approach, is crucial to protecting the seller’s sensitive information when in the hands of the buyer.
  • Sellers also use NDAs (along with transaction-related bonus incentives) to bring key employees into the loop and must develop effective communication strategies with other employees once the deal is done.
  • Before closing, the seller and buyer both have sales hats to wear in convincing customers, suppliers and other business partners that a potential deal will be good for them, too.

Loose lips sink ships. While those words took on a very serious meaning during World War II, they also ring true in the M+A world: loose lips just might sink your deal.

Most business owners pursuing a potential transaction are hyper-sensitive to confidentiality concerns. What happens if my customers find out? What happens if my team finds out? What if a deal doesn’t happen and my confidential information is now in the hands of a competitor?

All of these are real concerns and must be handled appropriately at the very beginning of even exploring a potential deal. So this month we’re talking all about not talking!

1. Confidentiality Considerations with the Buyer

First and foremost, sellers are rightly nervous about handing over their most sensitive information to the buyer without any assurance that it will ultimately lead to a deal. In many cases, the buyer is a direct competitor, or at least a potential competitor. If a deal doesn’t happen and the competition now knows your deepest secrets, what happens then?

Most business owners are very careful about making sure that there’s a good non-disclosure agreement (NDA) in place before sharing sensitive information. But your off-the-shelf NDA may not cover everything you’ll need in the context of a potential M+A transaction. A more robust M+A-focused NDA should, among other things, cover the following:

Clear and detailed definitions of what is protected vs. what isn’t protected
These definitions will dictate whether the information you’re trying to protect is actually protected, so you’ll want to review these carefully. Moreover, the very fact that the parties are discussing a potential transaction or that the potential buyer has received confidential information from the seller should also be treated as “confidential” for this purpose.

Restrictions against both unauthorized disclosure and unauthorized use of confidential information
Sometimes “use” restrictions get overlooked, but the “use” part is as important as the “disclosure” part.

Requirements to return/destroy confidential information when discussions break down
One of the key protections is the ability to ensure that the potential buyer can’t keep the information once discussions regarding a potential deal have ended. Sometimes there are exceptions to this requirement, but those exceptions should be narrow and impose a continuing confidentiality obligation for that retained information as long as it’s retained by the potential buyer.

Reservation of rights and disclaimers
The NDA should be clear that the seller is providing the buyer with access to the confidential information for the limited purpose of evaluating a possible deal. The potential buyer shouldn’t be treated as having acquired any right or license to the confidential information by virtue of obtaining that information from the seller in this context, nor should the buyer be allowed to rely on the accuracy or completeness of the confidential information at this stage. The NDA should address both of these issues clearly to avoid the possibility of creating unwanted rights in favor of the potential buyer.

Restrictions on hiring your employees
As part of the discussions around a possible deal, the potential buyer may meet or learn about key employees. The NDA won’t prevent the potential buyer from using this fact-finding mission as an opportunity to hire away your key employees unless there’s an explicit non-solicitation/non-hire clause in the NDA.

Maintenance of attorney-client privilege
If you’re sharing (or might be sharing) information regarding potential legal claims or non-compliance, you need to be careful not to inadvertently waive the attorney-client privilege (which protects certain communications with your counsel from being subject to disclosure in the context of litigation). A good NDA will address how such privileged information will be handled and preserve the privilege to the greatest extent possible.

There are also a number of other issues to be addressed, such as duration, required disclosures (e.g., in the event of a subpoena seeking that information), what happens in the event of a breach of confidentiality, and more. Some of those terms may exist in your “standard” NDA, but will likely be treated differently in the context of a potential M+A transaction.

And sellers are wise to remember that they have the right to remain silent! Just because you have an NDA in place doesn’t mean you have to share everything right away. Smart sellers use a staged approach for sharing sensitive information. The most sensitive information is shared only later on in the negotiations when the seller is more confident that a deal will get done.

Nonetheless, while NDAs and a focused strategy for how and when sensitive information will be shared are important, it’s still a big leap to actually lift the veil to a potential buyer. Unfortunately, that’s just part of the reality of selling your business. There’s a risk that a potential buyer might accidentally release—or even outright steal—your confidential information no matter how good your NDA is. But if you take the right steps on the front end, you can mitigate that risk and be in the strongest position to protect your information.

2. Confidentiality Considerations with the Team

Many sellers are terrified that word of a potential sale will leak to the employees, leading to panic, uncertainty or a mass exodus of talent. Many sellers therefore go to great lengths to keep things under wraps, which may include attempting to do the deal without any help or involvement from the team. That might work for some businesses where the business owner is directly involved in nearly every aspect of the business, but for many businesses, that’s simply not a realistic way to get a deal done properly. As a result, there comes a point in almost every deal where it’s necessary to bring at least some of the key employees into the circle of knowledge. And even if the seller still thinks he or she can “go it alone,” there will likely come a time in the due diligence process when the buyer wants to meet the team and understand their capabilities, commitment, etc.

While expanding the circle of knowledge is indeed nerve-wracking, if handled properly, it can actually be a positive both for the employee and for the seller’s prospects of getting the deal done successfully. To do this, many business owners will put in place a special transaction NDA with those key employees who will become aware of the deal. Those agreements obviously contain a confidentiality commitment to prevent the employee from telling others (either inside or outside the organization), but those obligations are usually coupled with some kind of transaction bonus, which keeps the employee engaged and incentivized to get the deal done. This strategy not only helps to keep the employee from jumping ship or worrying about his/her future employment opportunities, it actually makes that employee a partner in getting your deal done.

It’s important for sellers to know that these transaction bonuses will almost always be paid for by the seller, rather than the buyer. And while the buyer doesn’t care so much about these transaction bonuses if the seller is paying for them, the buyer does want to make sure that the employees aren’t receiving so much from the transaction that they might decide that they don’t need to stick around and keep working for the buyer. So there needs to be some consideration between paying the employee a transaction bonus package that is rich enough to be worth their time and commitment, but not so massive that it could affect the buyer’s ability to keep running the business after closing.

Finally, there’s likely going to be a whole bunch of team members who don’t find out about the deal until the deal is done. The communication strategy for those employees needs to be carefully thought out and coordinated with the buyer. This will be a tumultuous time for these people, but the right message delivered by the right people, at the right time, and in the right way will go a long way toward easing those fears.

3. Confidentiality Considerations with Customers/Suppliers

The last group we’ll talk about here are those external business relationships that are key to the business. Customers are always top of mind, but many businesses also have relationships with key suppliers and other business partners that need to be protected and handled appropriately.

In the first instance, most business owners don’t want these relationships to ever know that the company is for sale. But don’t kid yourself too much. If the business owner is advancing in age and hasn’t been talking about succession plans with their key business partners, you better believe those business partners are already thinking about it themselves. In many cases, these business partners will be happy to know that there’s a plan for the continuation of the relationship after the business owner exits, unless the potential buyer is a competitor to one of those business partners or has immediate plans to discontinue these relationships after closing.

Oftentimes, these outside business partners don’t actually need to know about the deal until the deal is done. So, again, a good communication plan is the key to strengthening and preserving these relationships. However, in certain cases, contractual restrictions may require that the seller obtain their consent to the transaction in order to transition the contract to the buyer. Or the potential buyer may insist on some pre-closing discussions with those key customers or suppliers to understand whether the relationship will continue after the closing once the buyer takes over. In those cases, there’s much greater risk and there’s unfortunately not a whole lot you can do to limit this risk, other than to delay these discussions until as late in the process as possible and to have a sound game plan for those discussions. The seller and the buyer both have an important “sales” job in these discussions: making sure that these customers/suppliers see how the deal is going to be good for them.

Next Month: The Dreaded Fraud Exception

Read last month’s piece: M+A Outlook for 2022

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