Selling a Business

Confidentiality Agreement – A pact that forbids buyers, sellers, and their agents in a given business deal from disclosing information about the transaction to others.

It is common practice for the seller, or his or her intermediary, to require a prospective buyer to sign a confidentiality agreement, sometimes referred to as a non-disclosure agreement. This is almost always done prior to the seller providing any important or proprietary information to a prospective buyer. The purpose is to protect the seller and his or her business from the buyer disclosing or using any of the information provided by the seller and restricted by the confidentiality agreement.

These agreements, most likely, were originally used so that a prospective buyer wouldn’t tell the world that the business was for sale. Their purpose now covers a multitude of items to protect the seller. A seller’s primary concerns are to insure that a potential buyer doesn’t capitalize on trade secrets, proprietary data or any other information that could essentially harm the selling company. A concern of the prospective buyer may be that similar information or data is already known or is being developed by his or her company. This can mean that both parties have to enter into some discussion of what the confidentiality agreement will cover, unless it is general in nature and non-threatening to the prospective buyer.

A general confidentiality agreement will normally cover the following items:

• A general confidentiality agreement will normally cover the following items:
• The purpose of the agreement – it is assumed that in this case it is to provide information to a prospective acquirer.
• What is confidential and what is not. Obviously, any information that is common knowledge or is in the public realm is not confidential. What information is going to be disclosed? And what information is going to be excluded under the disclosure requirements?
• How will confidential information be handled? For example, will it be marked “confidential,” etc?
• What will be the term of the agreement? Obviously, the seller would like it to be “for life” while the buyer will want a set number of years – for example, two or three years.
• The return of the information will be specified. For example, if the sale were terminated, then all documentation would be returned.
• Remedy for breach or determine what will be the seller’s remedies if the prospective acquirer discloses, or threatens to disclose any information covered by the confidentiality agreement.
• Obviously, the agreement would contain the legal jargon necessary to make it legally enforceable.

One important item that should be included in the confidentiality agreement is a proviso that the acquirer will not hire any key people from the selling firm. This prohibition works both ways: the prospective acquirer agrees not to solicit key people from the seller and will not hire any even if the key people do the approaching. This provision can have a termination date; for example, two years post-closing.

The sale of a company involves the disclosure of important and confidential company information. The selling company is entitled to protection from a potential acquirer using such information to its own advantage.

The confidentiality agreement may need to be more specific and detailed prior to commencing due diligence than a generic one that is used initially to provide general information to a prospective buyer.

Tips on Maintaining Confidentiality

• Use a code word or name for the proposed merger or acquisition.
• Don’t refer to any principal’s names in outside discussions.
• Conversations concerning the merger or acquisition should be held in private.
• Paperwork should be facedown unless being used.
• All documents should be kept under lock and key.
• Important data maintained on the computer should be protected by a password.
• Faxing documents should be done guardedly.

Getting your business and yourself,  as the business owner “ready to sell”, takes quite a bit of work and preparation. You need to know and work with someone whose sole profession is selling businesses. You know your business better than anyone, but do you know how to get it ready and in its best shape to sell?  Most probably not and the worst mistake a business owner can make is try to get both themselves and their business ready to sell and then try to sell it themselves.

• BUYERS WANT CASH FLOW

  Recasting financial statements will help you provide a potential buyer with a better view of cash flow.  Cash flow is not the same as profit.  All potential buyers will want to see the income tax returns, profit and loss statement, owner compensations, etc.

• LOOKS CAN MAKE A DIFFERENCE

  Just as you will need to do all that you can do to show a well organized, profitable business, you also will need to make sure that your facility is as aesthetically attractive as possible.  Anything that you do to increase sales, increases profits and adds to that important cash flow that buyers seek.

• ADD VALUE TO YOUR BUSINESS

  Don’t overlook the impact of a loyal customer lists, proprietary products, well-maintained equipment, special computer software programs, unique services or products and good employees will make when considering the value of your business.

• ELIMINATE SURPRISE

  If your business has any flaws, be open about them.  Do not allow legal, environmental or any other undisclosed problem to kell the deal.  You need to resolve any problem before you market your business for sale.

• ALWAYS SEEK PROFESSIONAL ADVICE

  The R. A. Kent Company, LL. Professionals are experienced, credentialed, and knowledgeable in helping buyers and sellers achieve their goals.  Call us today.

1. Your reason(s) for selling your business and your future goals need to be clear and well thought out before you try to market your business.  A prospective buyer will want to know why you are selling and may be curious about what you intend to do after the sale.
2. A poor economic climate and/or a peronal emotional dilemma can cause you to accept a deal that is not in best interest for you or for a buyer.  It is important to market your business for sale at a time when you are not under pressure to sell.
3. As soon as you have a firm objective to sell, gather key information to facilitate the marketing and divestiture process:
   • Three years of profit and loss statements.
   • Three years of Federal income tax returns for the business.
   • A complete list of business assets (fixtures and equipment).
   • All lease agreements and related documentation (property and equipment).
   • List of loan amounts and payment schedules.
   • Copy of franchise agreement (if applicable).
   • Total worth of the assets.
   • Names of outside advisors (accountant, attorney etc.).
4. When you decide to engage a professional to help guide you through the process of marketing and selling your business, you agree to become part of a team effort to make it happen.
5. Confidentiality will ebe emphasized by the professional as he works on your behalf to find a buyer just as you will maintain confidentiality about a pending Sale as you go about your day-to-day business operations.
6. It is very important that you look at your business as if you are a potential buyer.  What do you see?  This may help you determine what you need to work on or what you can do to improve a first impression.
7. As you navigate through the process of divestiture, keep the following in your focus:
   • Keep normal operating hours.
   • Keep your facility and your equipment in top condition.
   • Remove any superfluous items or items not included in the sale.
   • Spruce up the exterior and the interior of your property.
8. Engage a seasoned professional for the best possible results.  To parphrase David Gumpert, former Harvard Business Review associate editor, experienced lawyers know the necessity for some risk in negotiations, whereas inexperienced professionals are often reluctant to advise their clients to take any risk.
9. Flexibility and patience will pay off in the long run in getting the best deal.  The right buyer may be better than a higher price.  You have probably spent years building your business and yoiu certainly will want it to continue to be successful.
10. A successful deal is created when the transaction represents a win-win where all parties walk away happy.