Confidentiality: When to Tell Employees & Customers You're Selling Your Business

Selling your company is not to be taken lightly. In fact, telling the wrong people at the wrong time could jeopardize your company and your relationships.

You’re thinking of selling your company—but how do you keep the process confidential until you’re ready to let your management, employees, customers, and competitors know?

The short answer is, “It depends”. And it can be different for each audience. Selling a company is a very different experience than running a business. Each company is unique with different management styles, hierarchies, customer relationships and competitive environments.

Simply put, confidentiality during an M&A process is not to be taken lightly. In fact, telling the wrong people at the wrong time could jeopardize your business sale process, your employee morale, your key customer relationships, and even the company itself.

However, if you have the right team of M&A experts to help you implement a structured M&A process, there’s far less to worry about. You’ll be able to avoid the most common employee pitfalls and confirm a high level of buyer interest before sharing sensitive financial or customer information with internal stakeholders and relevant outsiders.

Let’s explore, step by step, how to best tell key managers, employees and clients about the sale (or potential sale) of your company.

First Step: Don’t skip the Non Disclosure Agreement

Everyone you speak with about the sales process should receive and sign a Non Disclosure Agreement (NDA) prior to disclosing that an exit is being contemplated. No exceptions.

Company owners are often overly trusting with their key managers, employees, partners, and support staff and this is the time to be the exact opposite—there’s a lot at stake and you don’t want to take any risks.

Although confidentiality agreements are only as good as the integrity of the people signing them, they do send a strong signal to restrict sensitive information to a need-to-know basis. And they do help keep your business sale process a secret until the transaction is complete. Even if you’re just “gathering interest” or “putting feelers out there,” you need to be protected so NDAs are always a good idea.

There is no “silver bullet” non disclosure agreement for every exit situation. Depending on your goals, different parties (key employees, strategic partners, potential buyers, etc.) may require different NDAs.

We recommend having an M&A attorney create or customize an NDA for each party, to ensure there are no issues, loopholes, or misunderstandings. It’s always better to be safe than sorry.

Pricing: A good mergers & acquisitions attorney can draft a few versions of your non disclosure agreement; one for key managers and employees and a second one for potential buyers. The cost of a custom non disclosure agreement should be under $500.

How (and when) to tell employees and stakeholders

Typically, the first person you need to inform is your CFO or controller. As long as this person knows that their job is secure today and post transaction and he or she has signed the NDA, this person can serve as your partner through the entire exit process. Selling a business is a time-consuming and intensive ordeal. The best internal person to have at your side should be the person who has the best understanding of your company’s financials. This person will save you from unnecessary distractions and costly mistakes and give additional confidence to your potential buyers

The second tranche of people to inform are key internal stakeholders, such as anyone with a “blocking right” to an upcoming change of control (sale) transaction. Blocking rights are typically issued to large shareholders or partners as well as lead investors. If one of these parties is able to vote against the sale of your business, you need to take steps to ensure that each stakeholder won’t block the sale when the time comes to sell.

Seller Story: Recently, we began counseling a founder dealing with a failed 2020 transaction. In this instance, the business owner failed to inform a stakeholder about the potential sale until it was nearly complete. But when the stakeholder discovered the deal very late in the process, he threatened to block it unless he was paid incremental (and significant) compensation to sign off. Unfortunately, the last-minute chaos led to bad blood between the founder, his executive team, the investors, and the buyer. The transaction was paused and ultimately failed.

Key employees are the next group you’ll want to tell when the time is right. Key employees are people your organization needs to function. Examples include your CMO, VP of Sales and Operations Manager. Each key employee will need to be part of this conversation once your preferred buyer is selected and is in the due diligence process. Each key employee will need to understand and agree to their ongoing role within the buyer’s organization. If one of these key employees decides to quit or not work for the buyer moving forward, you risk terminating the deal or affecting your sale price and/or earn-out structure.

Aside from those key groups, refrain from talking to anyone else about the sales process. Employees who learn that their company is about to be sold will feel undue stress and confusion and inevitably tell other employees creating a snowball effect of uncertainty and loss of morale. Keep everyone on a need-to-know basis until signing day.

That being said, it’s very important how you tell your people about the exit when the time is right to do so.

We recommend hitting these five key points when discussing the sale of your business:

1) We've decided to take on a partner to help us all grow the business.

2) We're not leaving and will continue to work alongside you everyday

3) All of your jobs will continue to be as secure as they are today

4) If you have any questions, please come talk to me anytime

5) Thanks to you all, we are looking forward to this next chapter in our company’s history

How (and when) to inform strategic partners and vendors about your intentions to sell the business

Strategic partners and vendors are additional key groups you need to consider. Imagine you run a jewelry store in Manhattan. You get all your diamonds from a single vendor that you’ve built a relationship with over the last 20 years. Now you have an opportunity to sell the store.

Of course, for your business to continue operating, you need to ensure that your trusted vendor will continue working with the new owners, even if you’re not at the helm. That means you need to be able to guarantee that this critical relationship and its key underlying agreements are transferable in the event of a sale. Otherwise, the transaction will likely not move forward.

Remember, strategic partners and vendors are often critical to your business. That’s why it’s so important that you have each partner’s buy-in when selling your business to new owners. When the time is right, often during buyer due diligence, you’ll need to assure each strategic partner how the existing relationship will continue and oftentimes ask each partner to extend or amend your existing contracts to ensure an ongoing relationship with the new owners. Transparency during the transfer of these strategic partnerships is paramount because great strategic partnerships are built over time, not only with contracts, but more importantly with trust.

What to tell your key customers

Your customers are unlikely to sign non disclosure agreement’s, but you may need to negotiate contract extensions or get approval from your customers to continue the relationship after the sale of the business (often referred to as a “change of control”). Regardless of the reason, you will likely have to tell your key customers about an upcoming sale because your potential buyers will want to eventually speak to some of your key customers during due diligence to make sure these key customers will stay in place after the new buyers take control of the company. The timing of when you tell your key customers about selling the business is critical and should be discussed and determined together with your M&A expert or investment banker.

Prior to due diligence, if a potential buyer asks you to share your customer list with them, your M&A expert will likely say this information is off limits until the last stages of due diligence. There are plenty of ways to give your potential buyers confidence that your customers will continue with the business without revealing names… yet. Handing over your customer list is dangerous and your list could easily end up in your competitor’s hands if you are not careful. It’s best to let your M&A expert handle these buyers and provide data that are helpful to the buyer but less intrusive to your business

One way to avoid sharing your customer list and also provide potential buyers with good information is to share what percentage of your revenue and or profitability comes from the top 10% of your customers. This is called identifying your business’s ‘Customer Concentration’. Understanding your company’s customer concentration is an important valuation question for buyers. But, there is no need at that point to tell them who those clients actually are.

The only time you should provide sensitive information like the identity of your customers is at the end of the process, during due diligence. At this point, your buyers will want to speak to a few of your customers and ensure you're truthful about your interactions with them and future projections. Do NOT over play these customer relationships at any point in your sale process because any exaggeration on your part could result in last minute price or contract negotiations from the potential buyer, which can delay your closing.

When to give your competitors a chance to make a big offer to buy your company

If you and your M&A expert have decided to approach competitors to potentially buy your business, we have found it effective to approach competitors out of respect for the hard-fought battles over customers and willingness to ensure continued growth for both businesses well into the future. Sure, you’ll likely have suspicions and doubts and the prospect of handing your hard work over to a competitor can evoke emotions may be uncomfortable but if done correctly this can create your best outcome for you and your employees.

First, be very careful about how you explain why you’re selling your business, why you are letting your competitor under the veil of trust and what information you share with them that might be different from every other perspective buyer. A good way to not look like you need to sell is to suggest that you are considering a sale because you were approached by a potential buyer with an attractive offer. This should get the attention of your competitor. The reason you are approaching them could be out of respect for the work they have done over the years and how your two companies would likely make a better fit to control a larger share of the market from which you could both benefit.

Be careful not to insult a competitor by insinuating that your business is superior to theirs. When you decide to share your Confidential Information Memorandum with them after a carefully edited NDA is signed, be careful to also edit the CIM appropriately. If you have negatively referred to this particular competitor in your CIM, your M&A expert should remove that section of the CIM before sharing it with your competitor.

Todd Sullivan.
Todd Sullivan

Todd graduated from Yale University where he was a 2-time MVP of Yale’s ice hockey team. After a year as a minor league hockey player in the San Jose Sharks and Toronto Maple Leafs organizations, Todd returned to school for his MBA at the University of Michigan where he graduated as Entrepreneur of the Year. Todd went on to build and sell four companies over the next 25 years with offices in Boston, San Francisco, Chicago, New York and Detroit. After the sale of his last business in 2015, Todd has dedicated his time to educating his fellow founders about the M&A process and helping many of them maximize the sale of their businesses.

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