Confidential Information and Business Sales

It can be Catch 22 for a business when it comes to a sale: you are looking for a purchaser, but not only do you want to keep your information confidential, you also don't want it to be come widely known that you are looking to sell.

At the initial stage, this can be managed relatively easily through using a business transfer agent to trawl their database or getting professional advisers to make discreet enquiries.

Once a possible suitor has been located, what next?

A seller will be wise to ascertain some information about the potential purchaser before identities are disclosed: what are they looking for, why are they looking and of course, most importantly, how much are they prepared to pay and on what terms?

Some of these questions can be answered anonymously. If the sale is sensitive, other factors such as the genuineness of the enquiry may need some delving into by professional advisers with the aid of sanitised accounts.

Once the feasibility of the transaction has been established, it is time for the parties to meet. 

There can be a tendency for an eager seller, being proud of the business, to give substantial information away before there is any obligation on the recipient to treat it confidentially.

A Confidentiality Agreement (or Non-Disclosure Agreement) is the traditional way of protecting information prior to the sale of business. However, it is a weak protection because, although it may provide a remedy in damages (and perhaps an injunction against further breaches), it can be costly to enforce and the damage has already been done if information has leaked into the public domain.

Sellers should therefore consider including in a Confidentiality Agreement an obligation to pay a fixed amount by way of liquidated damages as compensation for the breach. This can also be coupled with a Break Fees Agreement. In this way, if the purchaser discontinues negotiations, other than for a specified reason, he will pay compensation which at the very least covers professional fees. Compensation can also be made to include the expense of management time and also loss of opportunity with other potential suitors.

A purchaser may resist a Break Fees Agreement. But if he has already received anonymised basic financial and commercial information, he should have some measure of the target business. His other concerns can be covered in the exceptions which permit a discontinuance of negotiations for genuine reasons. A Break Fees Agreement can, and frequently does, work both ways, so that a purchaser is covered if the seller withdraws. On a rising market this can help to guard against a buyer being gazumped if a better offer comes along, unless the sale is proceeding by way of auction.

These two agreements taken together will do much to remove the seller's anxiety of dealing with fishing expeditions and time wasters. They will also help a genuine purchaser to put his money where his mouth is, which he will have to do in any case if the transaction proceeds.