Confidentiality Agreements: What are the Most Important Elements?

Every business has to be concerned about maintaining confidentiality.  In fact, it is common for business owners to become somewhat obsessed with confidentiality when they are getting ready to sell their business.

It goes without saying that owners don’t want the word that they are selling to spread to the public, employees or most certainly their competitors.  Yet, there is something of a tug of war between the natural desire for confidentiality and the desire to sell a business for the highest amount possible.  At the end of the day, any business owner looking to sell his or her business will have to let prospective buyers “peek behind the curtain.”  Let’s explore some key points that any good confidentiality agreement should cover.

At the top of your confidentiality list should be the type of negotiations.  This aspect of the confidentiality agreement is, in fact, quite important as it stipulates whether the negotiations are secret or open.  Importantly, this part of the confidentiality agreement will outline what information can be revealed and what cannot be revealed.

Also consider the duration of the agreement.  Your agreement must be 100% clear as to how long the agreement is in effect.  If possible, your confidentiality agreement should be permanently binding.

You will undoubtedly want to outline what steps will be taken in the event that a breach does occur.  Having a confidentiality agreement that spells out what steps you can, and may, take if a breach does occur will help to enhance the effectiveness of your contract.  You want your prospective buyers to take the document very seriously, and this step will help make that a reality.

When it comes to “special considerations” category, this should be elements that apply to the business in question.  Patents are a good example.  A buyer could learn about inventions while “kicking the tires,” and you’ll want to be quite certain that any prospective buyer realizes that he or she must maintain confidentiality regarding any patent related information.

Of course, do not forget to include any applicable state laws.  If the prospective buyer is located outside of your state, then that is an issue that must be adequately addressed.

A confidentiality agreement is a legally binding agreement.  And it is important that all parties involved understand this critical fact.  Investing the money and time to create a professional confidentiality agreement is time and money very well spent.  An experienced business broker can prove invaluable in helping you navigate not just the confidentiality process, but also the process of buying and selling in general.

Copyright: Business Brokerage Press, Inc.

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The Sale of a Business May Actually Excite Employees

Many sellers worry that employees might “hit the panic button” when they learn that a business is up for sale.  Yet, in a recent article from mergers and acquisitions specialist Barbara Taylor entitled, “Selling Your Business?  3 Reasons Why Your Employees Will Be Thrilled,” Taylor brings up some thought-provoking points on why employees might actually be glad to hear this news.  Let’s take a closer look at the three reasons that Taylor believes employees might actually be pretty excited by the prospect of a sale.

Taylor is 100% correct in her assertion that employees may indeed get nervous when they hear that a business is up for sale.  She recounts her own experience selling a business in which she was concerned that her employees might “pack up their bags and leave once we (the owners) had permanently left the building.”  As it turns out, this wasn’t the case, as the employees did in fact stay on after the sale.

Interestingly, Taylor points to something of a paradox.  While employees may sometimes worry that a new owner will “come in and fire everyone” the opposite is usually the case.  Usually, the new owner is worried that everyone will quit and tries to ensure the opposite outcome.

Here Taylor brings up an excellent point for business owners to relay to their employees.  A new owner will likely mean enhanced job security, as the new owner is truly dependent on the expertise, know-how and experience that the current employees bring to the table.

A second reason that employees may be excited with the prospect of a new owner is their potential career advancement.  The size of your business will, to an extent, dictate the opportunities for advancement.  However, if a larger entity buys your business then it is suddenly possible for your employees to have a range of new career advancement opportunities.  As Taylor points out, if your business goes from a “mom and pop operation” to a mid-sized company overnight, then your employees will suddenly have new opportunities before them.

Finally, selling a business could mean “new growth, energy and ideas.”  Taylor discusses how she had worked with a 72-year-old business owner that was exhausted and simply didn’t have the energy to run the business.  This business owner felt that a new owner would bring new ideas and new energy and, as a result, the option for new growth.

There is no way around it, Taylor’s article definitely provides ample food for thought.  It underscores the fact that how information is presented is critical.  It is not prudent to assume that your employees may panic if you sell your business.  The simple fact is that if you provide them with the right information, your employees may see a wealth of opportunity in the sale of your business.

Copyright: Business Brokerage Press, Inc.

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Around the Web: A Month in Summary

A recent article from Divestopedia entitled “When is the Best Time to Sell My Business” explains that a business owner who is looking to sell should begin preparing for the sale three years before they plan to list their business on the market.

The state of the market matters when listing your business, but what you can’t control this as a business owner. What you can control, however, is the state of your financial records, whether the business has any litigation outstanding, and the overall appearance and wellbeing of the business. In order to sell your business at the highest value possible, there are certain things that need to be taken care of before listing. By giving yourself about three years (the number of years of clean, verifiable financial statements you should have) to prepare your business for sale, you are giving yourself and your business the best chance on the market.

Click here to read the full article.

A recent article from Inc.com entitled “Small-Business Financing 102: The Latest Updates and Options Available for Funding a Business Venture” explains what each type of startup funding entails and how it’s affecting both buyers and sellers. Currently the ways to fund a new business or to purchase an existing one include:

  • SBA Acquisition loans
  • Peer-to-Peer lenders
  • 401(k) business financing
  • Crowdfunding and angel investors

Each option presents its own set of obstacles and requirements that need to be met by the buyer, just as they each provide their own benefits. The increasing number of ways in which an aspiring entrepreneur can acquire the capital to start or buy a business is great news for sellers because it means more buyers on the market.

Click here to read the full article.

A recent article from Exit Promise entitled “Top Seven Important Deal Terms When Selling a Business” highlights the main factors, other than price, that influence a seller’s decision when considering an offer on their business. While price matters, business owners care about their businesses and generally want the best for both themselves and their business, therefore they consider these factors in the sale as well as price:

  • Speed of the sale
  • An all cash offer vs. a financed one
  • The compatibility of the potential new owner with their vision for their business
  • % of the business the new owner wishes to purchase (most prefer to sell 100%)
  • Whether or not there’s an earnout clause written into the deal
  • The tax consequences associated with the deal
  • Confidentiality of the sale

In the end, sale price is generally the primary focus of negotiations between a seller and a buyer. However, it is not uncommon for a buyer to choose to accept a lower offer, for example, if it’s a complete cash sale to a buyer whose business plan aligns well with the current owner’s dream for the company’s future.

Click here to read the full article.

A recent article from FinSMEs entitled “Raising funds to Buy a Business; What Are The Different Options?” explains the different ways to fund a business acquisition, how to approach each way and who it’s best for. The options explained include:

  • Savings
  • Traditional lenders
  • Borrowing from family and friends
  • Crowdfunding
  • Investors

Each of these options comes with its own obstacles and upsides, and some may be better options than others. Whichever option you choose to go with, be sure to do your research and prepare yourself for meeting the demands of each source of funding.

Click here to read the full article.

A recent article from Exit Promise entitled “Business Broker Fees and Other Selling a Business Expenses” explains the typical fees and expenses that a business owner can expect to come across during the process of selling their business.

Business Broker Fees:

  • Small Business:  Typical fees include a 10% commission of final sale price and upfront $1000- $2500 to market, value and sell the business.
  • Large business: Typical fees include 3-10% commission of the final sale price and upfront fees ranging from $2,500 to $25,000+.

These fees can vary from broker to broker depending on their expertise and services offered. They can also vary depending on the size of the business and specific services and time needed from your broker. It is always recommended to get multiple quotes from qualified brokers who specialize in your industry and the services you need.

Legal costs:

  • Small Businesses ( $1MM or less) : total legal fees are typically between $5,000 and $12,500
  • Large Businesses ($1MM and up): total legal fees can range from $10,000 to $50,000+.

Your broker can recommend attorneys that are experts in business sales and negotiating with your buyer’s lawyer, protecting your interests and keeping legal fees from becoming excessive.

Other hidden fees can include severance payments to employees not retained by the buyer, prepayment penalties associated with paying off indebtedness of the seller, taxes, appraisals if necessary and a CPA.

Click here to read the full article.

Copyright: Business Brokerage Press, Inc.

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What Sellers Don’t Expect When Selling Their Companies

In the proverbial “perfect world,” business owners would plan three to five years ahead to sell their companies.  But, as one industry expert has suggested, business owners very seldom plan to sell; rather, selling is “event driven.”  Partner disputes, divorce, burn-out, health, and new competition are examples of events that can force the sale of a business.

Sellers often find, after they have decided to sell, that the unexpected happens and they are “blindsided” and caught off-guard.  Here are a few of the unexpected events that can occur.

The Substantial Time Commitment

Sellers find that the time necessary to comply with the requests of not only the intermediary, but also the potential buyers can take valuable time away from the actual running of the business.  The information necessary to compile the offering memorandum takes time to collect.  Many sellers are unaware of the amount of their time necessary to gather all the documents and information required for the offering memorandum, nor of its importance to the selling process.

There is also the time necessary to meet and visit with prospective buyers.  An intermediary will play an important role in screening prospects and separating the “prospects from the suspects.”

Handling the Confidentiality Issue

Owners of many companies are also the founders and creators of them.  They can have difficulty in delegating and tend to want to make all of the decisions themselves.  When it comes time to sell, they want to be involved in everything, thus, again, taking time away from running the business.  Members of the management team, like the sales manager, have a lot of the information necessary not only for the memorandum, but also on competitive issues, possible acquirers, etc.  The owner has to allow his or her managers to be part of the selling process.  This is easier said than done.

Forgetting the Others

Many mid-sized, privately held companies also have minority stockholders or family members who have an interest in the business.  The managing owner may be the majority stockholder; but in today’s business world, minority stockholders have strong rights.  The owner has to deal with these people, first in getting an agreement to sell, then convincing them about the price and terms.  A “fairness opinion” can help resolve some of the pricing issues.  Minority stockholders and family interests have to be dealt with and not overlooked or pushed to the end of the deal.  When this happens, many times it is the end of the deal, literally speaking.

The Price is the Price is the Price

All sellers have a price in mind when it comes time to sell their companies. Most businesses go to market with a fairly aggressive price structure.  When an offer(s) is presented, it is generally, sometimes significantly, lower than the seller anticipated.  They are never prepared for this event – they are blindsided, and obviously not very happy.  They turn the deal down without even looking past the price.  Here is where an intermediary comes in, by helping structure the deal so it can work for both sides.

Not Having Their Own Way

Business owners are used to calling the shots.  When an offer is presented, they, in some cases, think that they can call all of the shots.  They have to understand that selling their company is a “give and take.”  They can stand firm on the issues most important to them, but they have to give on others.  Also, some owners want their attorneys to make all of the decisions, both legal and business.  Unfortunately, some attorneys usurp this decision.  Owners must make the business decisions.

Confidentiality Leaked

There is always the small possibility that the word will leak out that the business is for sale.  It may just be a rumor that gets started or it may be worse – the confidentiality is exposed.  Sellers must have a contingency plan in case this happens.  A simple explanation that growth capital is being considered or expansion is being explored may quell the rumor.

“Keeping Your Eye on the Ball”

With all that is involved in marketing a business for sale, the owner must still run the business – now, more than ever.  Buyers will be kept up-to-date on the progress of the business, despite the fact that it is for sale.

Copyright: Business Brokerage Press, Inc.

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