Buying a Business: Three Reasons to Keep it Confidential!

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Buying a Business: Should You Keep Your Purchase Confidential?

If you are considering buying a business – and especially if you’re about to close on the deal – your natural inclination is likely to be to announce the purchase to the world. You want your friends to know, you want your former co-workers to know; you definitely want your ex-spouse to know or, in a “take-this-job-and-shove-it!” moment, you sure want your mean old boss to know! You want to shout it from the rooftops! But this little bit of ego-gratification may be one of your dumber ideas – and there’s an excellent chance it will hurt the business. How? Let’s go over some of the reasons.

Many buyers of businesses want to tell the world that they now own a business. They are their own boss! They’ve told their old boss what he could do with their crummy old job.

But businesses thrive on stability not upheaval. Customers like familiarity. Employees like familiar surroundings, routines and chains of command. Competitors, normally somnolent in their routine and complacent with the status quo, will smell blood in the water and suddenly become ferocious marketers and aggressive antagonists if they sense an opportunity; and the sale of one of their competitors will certainly be seen as an opportunity to be jumped on.

Seller should also want to keep the fact that they are selling their business confidential and for the same reasons meaning that you and the seller should be on the same page with the same objectives. Let’s take a look at the three most important reasons for keeping the news of your business acquisition confidential.

Reason #1: Clients and Customers

Customers – people in general – like familiarity; the regular sales staff, the regular product line or service, the usual ordering process. When customers hear that a business is for sale or that the ownership is about to change, they worry about service levels (assuming the business has been providing excellent service); they worry about seeing or talking to their favorite employees; they worry about whether the new owners will raise prices; they worry about the buying process; they worry about the possibility that the new owners won’t carry the same product line or that quality will suffer; they worry about all kinds of stuff, much of it silly but some of it quite serious. And you need to be aware of this worry – and, if the sellers don’t understand it when you start getting serious, explain it to them because if both of you are not on the same page, the business is likely to suffer.

Upon learning that a business they’ve long relied upon might be sold, clients and customers will naturally start to consider how such a sale might impact them. If they’re worried about the availability and reliability of whatever product or service they buy from your target business, they will begin to look around to find an alternative source, just in case. This compounds the problem insofar as their search for an alternative source is likely to alert the company’s competitors that the company is being sold. Why does this matter? See the Reason 3: Competitors section, below.

Reason #2: Employees

A good portion of a business’ value is the result of the efforts of its employees. If they get freaked out, you might lose them. Even if they don’t freak out, competitors may try to poach them.

Employees worry about their paycheck, their pay rate, what benefits might change – everything from the hours they’ll get to whether the Christmas party will still be as grand. No matter what you or the seller say to ease their concerns, they will, quite naturally, worry about their jobs; whether they will keep them and, if so, how they might change.

Certain employees will have to know about the potential sale before the sale actually happens, of course. Depending on the size of the business, it may have a chief financial officer (CFO), in-house counsel, vice president of operations in another country and so on. These and similar management-level employees will necessarily know about the projected sale by dint of having to be involved in the retrieval and provision of information required by you, the buyer, during the due diligence period. But the majority of the business’ employees do not need to know and, if you’re smart, you will make no drastic immediate changes to the business when you take it over which, in many cases, will result in some employees coming to management a year later with a look of bewilderment on their faces and asking, “When did that happen?”

Reason #3: Competitors

When competitors hear that a business is for sale, the smart ones will pounce – on customers, clients, employees, vendors and anybody else that they think might result in a competitive advantage. We’ve had a specific example in which a competitor had been trying to hire away a manager of a company we eventually represented when it came time to sell. The manager always turned the competitor down, even though the competitor offered a marginally better compensation package. He loved working for the company. He felt like part of the family that owned the business and was loyal to them. But when the business owners decided to sell the business, one of them foolishly let that fact leak out. Employees heard about the possible sale. Competitors got wind of the fact that they wanted to sell and the competitor that had been trying to poach the manager made another run at him – and got him. (See “Reason #2: Employees”, above!)

As much as he loved working for the business, he was not sure what the change of ownership would mean. And he considered that there was a strong possibility that things would change and that he might not like new owners – any new owners – quite as much. So he jumped ship leaving a big hole for you to fill.

This obviously results in a problem for you. When a key employees leaves, someone has to be trained to replace him. Any trade secrets of the company that he is privy to are now in the hands of the competition. The employees that reported to that manager were most likely very loyal to him. There’s a good chance that some of them will leave, as well. They’ll probably follow him to the competitor, thereby compounding the damage to the business.

What’s a Business Buyer to Do?

If you’re buying this business, these are problems you don’t need. There will be plenty of other issues that you’ll have to deal with during the transition period; finding replacement employees, retaining squeamish customers and fending off suddenly aggressive competitors shouldn’t be on your list – and needn’t be if you and the seller have the same goal.

And, yes, the issues described above are issues for the seller to be aware of particularly given that every one of these issues could – and likely would – result in a decrease in the value of the business he is trying to sell. But if you’re the buyer, they will impact you for a much longer period of time. Who knows how much damage will be done to the long term health of the business or how long it will take the business to recover?

When we’re involved in a deal – on either side – we strongly urge the buyer to keep the purchase confidential for as long as a year. Of course, this is not always easy. First of all, the employees will almost certainly know about it early on. Yes, most business transfers involve a transition period during which the seller stays on and, with some thought and planning, you and the seller should be able to “finesse” an explanation of your presence, at least for a while. Yes, upper-level management will have to be told and there is little you can do to stop any of them from talking outside the business. But don’t call the newspaper. Don’t issue a press release. Don’t swagger around with a puffed-up chest going all bossy on everyone. Be cool. Be patient. Be focused on keeping the business you just bought healthy. After all, you will be the seller one day.

As Brokers, How Do We Approach This?

When we have a deal moving to contract, we recommend to both parties that we include a confidentiality agreement whereby the parties agree to keep the deal itself – to say nothing of the terms and conditions – confidential. Sometimes we’ll recommend a time period for this confidentiality but most often we structure this agreement so that whoever wants to announce anything must get the other party’s approval – first, to announce and second, for the type of announcement (press release, ad, sign on the business, whatever) and, finally, the language, graphics and other content of the announcement. Such approval will have a sunset clause; this means that the requirement for both parties to approve the announcement will end at some point. After all, the transfer will not be a secret forever. The fact of the sale will leak and some enterprising reporter will show up asking questions – an issue deserving of a post all by itself!

If you have any questions or comments, put them in the Comments box, below. I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!

Joe

The author holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at joe@WorldwideBusinessBlog.com

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