There’s multiple reasons behind this decision. When you buy an established business, you are acquiring more than furniture, fixtures, equipment and leasehold improvements. You are buying a proven model, a good name in the community, and established vendor and customer relationships. The very attributes that make a business successful may be jeopardized when it becomes publicly known that it is for sale.
If a business’ for-sale status begins to circulate in the community, some may read this as a sign that the business is distressed. In most instances, the opposite is usually the case. Personal more so than financial reasons tend to drive a business owner’s decision to exit their company. Most sellers wait to go to market until they have a solid, sustained track record of growth. While the business is listed, they continue to focus on growing market share, revenue and bottom line profits.
There are other potentially negative consequences. Vendors may begin to identify alternative outlets for their wares or services. Employees become nervous, weigh their options and circulate their resumes. Competitors could be emboldened to poach employees or encroach upon their customer base.
Confidentiality allows the seller and the ultimate new owner to control this message. The latter decides when it makes sense to make this information publicaly known. Some wait a month or longer after the paperwork is officially inked to have the time to secure important relationships.
The Soul (and Paperwork) of Discretion
When a seller entrusts us to bring their business to market, it is an act of confidence in our ability to protect their confidentiality. We take this commitment seriously and have implemented numerous safeguards to minimize the exposure of their business.
Safeguard 1: SGA’s Employment Contracts
Anyone who works for Sam Goldenberg & Associates, whether an employee or contract labor, is required to sign an employment contract. That document clearly states that any information acquired from their association with SGA is to be held in strict confidence. If the message is not clear, time is devoted to the topic in their initial orientation. Indiscretion is grounds for termination.
Safeguard 2: Client Review of All Marketing Products
We have several layers of marketing material, each presented to a prospective buyer at different junctures. The seller has the opportunity to review comments, question, correct and edit each of these work products.
The first product is the Confidential Online Listing Presentation, which we post to our various online businesses-for-sale market places. Because this is widely seen, it is the most generic. The goal is to provide the business buying community with enough information to pique their interest, but not so much that it can easily be identified.
Safeguard 3: Non-Disclosure Agreement
No identifying information about a business is disclosed until the prospect has signed a non-disclosure agreement. We don’t make exceptions.
This agreement has several stringent clauses, including: No unauthorized contact with a business’ employees, customers or vendors; all information must be held in strict confidence for a minimum of three years; and unless they are already in the business, they cannot open or acquire a competing business.
Safeguard 4: Personal Financial Statement
This document details a buyer’s assets and liabilities. A buyer must meet the minimum requirement. This is typically 20 percent of the asking price in cash or other readily available funds.
Inadequate funds are not necessarily a deal-breaker. We may point them in the direction of a business that fits their financial means and interests; or call them to learn if they have access to other potential funding sources.
The experienced business buyer often has already their own version of this document. They send it without a second thought. The first-time business buyer may find this request intrusive, but it needs to be remembered: To share sensitive information about a business, we must first receive sensitive information from the buyer.
Safeguard #5: The Interview
A phone or in-person interviews allows us to discern their sense of urgency, motivations for buying a business, and whether the initial business is a good fit for their interests and background. If we conclude that they are a strong candidate, we set up a meeting at our office or arrange an off-hours visit with the client at the business site. If they do not commit to moving forward, we may bring up other opportunities for consideration but do not share additional information about the business that prompted their original inquiry.
Safeguard #6: The Confidential Business Review
The Confidential Business Summary reinforces their commitment to maintain confidentiality. In addition to identifying the business, it details the history, market position, growth opportunities, facility, lease or real estate, and other relevant information. It also contains a cash flow analysis, which provides a three-year overview of the business’ performance and what the current owner has earned, after discretionary spending is added back. It may also include the Profit and Loss statement for the most recent complete year. The information is adequate for a prospective buyer to determine whether to take the next step. While a comprehensive document, it does not disclose everything.
Safeguard #7: Executing a Letter of Intent (LOI)
If they are a strong candidate for the targeted business, we steer them toward submitting an LOI. It is usually only after an LOI has been accepted by both parties that the buyer’s due diligence phase begins. They will have access to the business records for the last three years and be able to conduct employee interviews. This can be a disruptive process to the current owner and their staff, and it is only merited when a buyer is serious. An executed LOI is a clear sign that a buyer is.
Rule Breakers: Going Public
Considering all the possible negative outcomes of going public, some sellers nonetheless chose to take this step. Their reasons vary, but never is it a cavalier decision. A quick sale is sometimes best achieved by going public. Other times they recognize that there is no way to advertise the business’ most attractive assets without making it possible for the public to discern its identity.
Complete discretion and public disclosure are on polar ends of the same continuum. Concealing the location and other possibly identifying characteristics will protect the business, but sometimes at a cost. If you have a business for sale in Albuquerque, but don’t publicize this fact, you are failing to optimize one of its most attractive features and potentially reduce the number of inquiries. According to industry watchers, not stating the business location means a 20 to 40 percent drop in requests for more information.
Going public rarely results in the worst case scenario described above, but it’s up to the seller to decide where their comfort zone lies and our job to make sure that this decision is respected.