Buying, selling or merging a business should not happen without due diligence, which involves sharing sensitive information about the business. As negotiations progress, owners must provide increasingly detailed information about sensitive items such as customers and suppliers, financials and taxes, intellectual property, litigation and claims, and personnel. M&A negotiations are usually complicated, and deals often fall apart, perhaps leaving the other side (who may even be a competitor) with sensitive information and details about a business. Companies can take measures to minimize this risk.
It is generally advised to keep news of a potential sale or merger confidential. Possible changes in ownership cause concern among personnel, who may worry about how it will affect their jobs. Similarly, customers and suppliers may also be concerned with how a change in ownership will affect the business relationship and their business’s bottom line.
It is essential for owners to limit news of the negotiations to trusted personnel who already have access to sensitive data and need to work on the proposed transaction during negotiations. Owners often incentivize a select group with a retention bonus to stay with the company through closing or for a subsequent transition period. Sometimes, internal nondisclosure agreements are used to emphasize the need for confidentiality.
Depending upon the number of personnel at the company, a sizable number of them may only be aware of the deal upon closing. The buyer or merger partner generally likes to be involved in communications with their new staff to maximize retention and keep the tone positive.
Announcing the transaction publicly
The buyer or merger partner will also likely want at least some control over the change in ownership announcement to other businesses and the general public. Each company’s community profile is different, and the impact of a deal could affect a market segment. Perhaps most delicate is maintaining critical relationships with vendors and customers. The seller wants to retain business relationships that add value to the company. At the same time, the potential partner or buyer will likely want to confirm relationships with top customers and help ensure that the connections remain strong after closing the deal. The seller generally manages the timing and orchestrates the best approach for these communications.
Initial conversations might not go into much detail about the businesses, but at some point, the parties must lay their cards on the table for a deal to move forward. It is critical to implement an effective confidentiality or nondisclosure agreement. These should address the specifics and be detailed. Important considerations include:
- Confidential information: Describe all of a company’s confidential information that should be protected.
- Nondisclosure/nonuse: Explain what sorts of advisors and insiders can have access to confidential information and on what terms. Specify how, if or when vendors, customers and employees can be contacted.
- Nonsolicitation: The buyer or potential partner may be particularly impressed with particular members of the seller’s team. Key employees are critical to a company’s ongoing value and future success, so the seller may require a provision to protect and retain staff in case the deal falls through.
- Destruction or return of information: The agreement should outline how the confidential or proprietary information is returned or destroyed.
- Clearly establishing rights: A potential deal is the only grounds for sharing the information, so the receiving party should have no rights to use the information conveyed. Conversely, the disclosing party may want to establish that they are not providing warranties or completeness of information.
Experienced M&A guidance
Many business owners built their companies by creating great products or services and then negotiating agreements tied to them. M&A deals are often more complex and involve the risk of allowing outsiders to look at proprietary and confidential information. Attorneys and other business professionals can help protect owners and buyers from undue harm caused by failed negotiations or closing deals they will later regret.