What information to disclose to potential business buyers, and how to disclose it

As part of the process for selling your business, you will need to provide enough information for a potential buyer to make decisions – both on whether to proceed with the purchasing process, and what price they are prepared to offer.

Much of the information which will be requested as the basis for decision making will be of a commercially sensitive nature – encompassing such factors as the value and volume of sales, profit margins, customers, staffing, business processes, and intellectual property. 

Potential buyers will want to see this information, but as the business owner, you may want to limit what buyers can see, and prevent that information from going any further. 

Having a potential buyer sign a confidentiality agreement or non-disclosure agreement (NDA) gives you some protection. If potential buyers do breach confidentiality and the good faith process of undertaking due diligence, you have a better chance of taking legal action and seeking damages if they have signed a document promising not to breach confidentiality.

Various pieces of information that are not publicly available to potential purchasers through such avenues as your company website or company records can be protected by a confidentiality or non-disclosure agreement. These may include:

• Details of a new product line
• New technology or innovations
• Business plans
• Financial information
• Databases
• Customer and supplier names
• Employee details.

Although keeping elements of your business private is important, you need to balance that dynamic with the buyer being able to complete robust due diligence and establishing what makes your business financially viable.

One way to limit who gets your company’s operational information, is to disclose only some parts to general queries, and then only full disclosure to seriously interested parties.

Within a typical non-disclosure agreement, potential buyers agree:

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

Most commonly when selling your business, you can call on the professional services of either your lawyer or your business broker to provide a standardised confidentiality agreement. New Zealand Business Brokers has advised on this issue extensively for years, and has expertise in guiding you through the process.

In some cases, you may also require your employees to sign a confidentiality agreement or non-disclosure agreement as well - especially if they are involved in the sale process, such as the chief financial officer/accountant, or the chief information officer/IT manager.

Potential buyers who are serious about purchasing a business will expect to sign a non-disclosure agreement, and failure to provide one may reflect poorly on your professionalism and business acumen. Conversely on the other side of the spectrum, a potential buyer who refuses to sign a non-disclosure agreement is either not truly interested in buying the business, or is inexperienced in how the process works.

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

There are several compelling reasons for utilising a confidentiality agreement in the sale and purchase process. These include:

• Keeping news of the potential change of ownership from being released to customers – as you want the business to continue “as usual.”
• Selling a business can be unsettling for current employees, who may worry about job security, and might consider the due diligence process an opportune time to leave. Most employers want to retain any key employees in positions of trust to add value to the business opportunity being offered for sale.
• Helping protect the financial and intellectual property rights of the business. If a potential buyer decides against the purchase, a non-disclosure agreement reduces the likelihood they will reveal any information learned while conducting their due diligence.
• Potential buyers feeling more secure knowing that the information is protected - so when ownership changes hands, any sensitive information which they take ownership of will not become public knowledge.

Before placing the non-disclosure agreement in front of a potential buyer, your business broker can save you a lot of time by ensuring the purchaser is genuinely interested.

An effective method to pre-qualify prospects is for your business broker to describe your business and response requirements in a way that helps unqualified buyers opt themselves out of the process. Pre-qualifying questions may include:

• What the buyer is looking for in a business purchase
• Their purchase timeline
• Their related business experience
• If they have the financial means to buy your business.

Genuine parties will have no issues providing your broker with this information. Ultimately, you’re trying to find a person that not only will be able to afford your business, but one that fits with the culture of your business.

Selling your business is exciting, and for many business owners, will have been their end goal. The last thing you want is for sensitive information to leak - causing damage to your business and unrest among your staff. A confidentiality agreement helps reduce the chance this will happen, and protects potential buyers who are assessing your business - one less thing to worry about in what can be a challenging period.

New Zealand Business Brokers can help you through the confidentiality agreement process, so feel free to contact us for an obligation-free discussion.