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Prepare To Exit

Exiting a business with financial success takes knowledge and planning.

Change is an inevitable aspect of every life cycle. With business, the final evolution can take a variety of forms. You may be ready to retire and pass the business on to a family member. Perhaps your goal is to sell to outside investors and use the proceeds as a retirement nest egg. Or the business may have declined so much that the best exit is a legal dissolution of your company. These tools and resources will help you manage the big decisions ahead for a successful transition.

Why you need a signed confidentiality agreement

Alvin Fritschle

By Alvin Fritschle

Alvin Fritschle is the Chairman of the Board of First Bank, a community bank serving Southeastern Illinois and Southwestern Indiana. He has provided financial advice to numerous entrepreneurs for over 40 years as a certified public accountant and the President of First Bank. Over this time, he has demonstrated a strong commitment to assisting his clients with their strategic decisions.

Your trade secrets are invaluable. After all, your ’secret sauce’ is your competitive advantage. It’s the thing that makes your business unique and special. When you decide to sell your business, you’ll need to provide enough information for a potential buyer to make a decision. Some will be sensitive information about your sales, profit, customers, business processes and know how.

Potential buyers will want to see as much information as they can. You may want to limit what buyers can see, and also prevent the information from being shared with anyone else. Although keeping elements of your business secret is essential, you do need to balance it with the buyer wanting to complete a robust due diligence and to find out what makes your business tick. 

A confidentiality agreement (non-disclosure agreement or NDA) offers a means to protect valuable company information from being shared with the public or leaked to competitors. A confidentiality agreement specifies that another party cannot share proprietary information without your consent. Having a potential buyer sign a confidentiality agreement gives you some protection. If confidentiality is breached, you have a better chance of taking legal action and seeking damages.

You’ll probably use your lawyer to draft this confidentiality agreement. With his or her legal advice, you’ll ensure that all the boxes are ticked and the agreement contains everything it should.

Benefits of a confidentiality agreement

There are several good reasons to have a confidentiality agreement, including:

  • Keeping news of the potential change of ownership from being released to customers. You want the business to continue as usual.
  • Selling a business can be unsettling for employees, some who may wonder about the security of their jobs. Others may consider it an opportune time to leave. You’ll want to retain any key employees in positions of trust.
  • Helping to protect the financial and intellectual property rights of the business. If a potential buyer decides against the purchase, an agreement reduces the likelihood they will reveal any information they learned while conducting their due diligence.
  • Making the potential buyers feel more secure knowing that the information is protected. So, when ownership changes hands, any sensitive information that is now theirs isn’t public knowledge.
  • Asking potential buyers who are serious to sign an NDA as a measure of your professionalism. A potential buyer who refuses to sign an NDA is either not really interested, or they are inexperienced as to how the process works. It’s a useful test.

Aside from the agreement itself, it's also important that your intention to sell your business is kept confidential until you're ready. If word leaks out prematurely, customers may alter their buying behavior or speculate as to why.

Creating the confidentiality agreements

Most agreements are quite standard. The potential buyers agree:

  • That any information provided about the business is confidential.
  • Not to divulge the information to anyone else, even the news that the business is for sale.
  • To return all business records and data to you after it has been reviewed.
  • Not to make copies of the information.
  • Not to contact your employees, customers or suppliers.
  • That it's their responsibility to make an independent verification of the information provided.
  • To allow you to obtain their financial and credit information, so you can verify that they are capable of purchasing the business.

Your attorney will draft an agreement that lays out these terms in more formal, legal language. However, you can download free, sample templates of non-disclosure or confidentiality agreement templates an internet search. Most of what you find will include the necessary information.

Prequalify potential buyers

Before placing the confidentiality agreement in front of a potential buyer, you can save yourself a lot of time by making sure they are a genuinely interested party and have the means to purchase the business.  An effective way to prequalify prospects is to describe your business and response requirements in a way that helps unqualified buyers opt themselves out. In every advertisement you place, either in print or online, ask potential buyers to provide the following information:

  • What they are looking for in a business purchase
  • Their timeline to complete the business purchase
  • Their related business experiences
  • If they have the financial ability to buy your business

You can cover this request in one sentence such as:

Please outline your related business background, the type and size of business you seek, your investment capability and your interest in this business.

It’s almost like a job interview. People who are genuine will not have an issue providing this information. Ultimately, you’re trying to find a person who will not only be able to afford your business, but one who also fits with its culture.

Summary

Selling your business and moving on to the next chapter of your life is often an exciting time.  The last thing you want is for sensitive information to be made public, causing damage to your business and unrest amongst your staff. A confidentiality agreement helps reduce the chance this will happen while protecting potential buyers who are assessing your business.

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