When it comes to buying or selling a business, a solid confidentiality agreement is a must. A key way that business brokers and M&A advisors help buyers and sellers is through their extensive knowledge of confidentiality agreements and how best to implement them. In this article, we will give you an overview of what to expect out of your confidentiality agreements.
A confidentiality agreement is a legal agreement that essentially forbids both buyers and sellers, as well as related parties such as agents, from disclosing information regarding the transition. You should have a confidentiality agreement in place before discussing the business in any way and especially before divulging key information on the operation of the business or trade secrets.
While a confidentiality agreement can be used to keep the fact that a business is for sale private, that is only a small aspect of what modern confidentiality agreements generally seek to accomplish. Confidentiality agreements are used to ensure that a prospective buyer doesn’t use any proprietary data, knowledge, or trade secrets to benefit themselves or other parties.
When creating a confidentiality agreement, keep several variables in mind:
- What information will be excluded
- What information will be disclosed
- The term of the confidentiality agreement
- The remedy for breach, and
- The manner in which confidential information will be used and handled.
Any effective confidentiality agreement will contain a variety of key points. Sellers will want their confidentiality agreement to cover a fairly wide array of territory. or example, the confidentiality agreement will state that the potential buyer will not attempt to hire away employees. In general, this and many other details, will have a termination date.
The specifics of how confidentiality is to be maintained should also be included in the confidentiality agreement. Parties should agree to hold conversations in private; this point has become increasingly important due to the use of mobile phones and in particular the use of mobile phones in out-of-office locations. Additionally, it is prudent to specify that principal names should not be used in outside discussions and that a code name should be developed for the name of the proposed merger or acquisition.
Safeguarding documents is another area that should receive considerable attention. Digital files should be password protected. All paperwork should be kept in a safe location and locked away for maximum privacy when not in use.
In their enthusiasm to find a buyer for their business, many sellers have overlooked the confidentiality agreement stage of the process. Most have regretted doing so. A confidentiality agreement can help protect your business’s key information from being exploited during the sales process. Any experienced and capable business broker or M&A advisor will strongly recommend that buyers and sellers always depend on confidentiality agreements to establish information disclosure perimeters.
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Most business buyers and sellers are wondering what 2021 and beyond will bring. BizBuySell and BizQuest President Bob House provided a range of insights stemming from BizBuySell’s 3rd Quarter Insight Report and a survey of over 2,300 business owners.
The simple fact is that the pandemic has most definitely had a major impact on the buying and selling of businesses. This fact is obvious. But diving deeper, there are a range of insights that can be gleaned.
First, owners do understand that COVID is a massive force in business right now. According to the survey, 68% of owners feel that they would have received a better price for their business in 2019 than in 2020. Only 37% of respondents felt that they would receive a better price this year. Of owners who felt that they would receive a lower price in 2020 than in 2019, 71% of these owners said that their assessment was directly tied to the pandemic and its accompanying economic impact.
A question on the survey asked owners if the pandemic had impacted their exit plans. 55% responded that the pandemic had not changed their exit plans. Additionally, 22% said that they now planned on exiting later, and 12% stated that they planned on exiting earlier. In short, the majority of business owners were not changing their exit plans.
On the other side of the coin, buyers are acknowledging that the present seems to be a very good time to buy. A staggering 81% of buyers stated that they felt confident that they would be able to find an acceptable price point. In terms of their purchasing timeline, 72% of respondents stated that they were planning on buying a business soon. Survey follow-ups indicated that large numbers of buyers were also planning on buying in 2021.
Generational differences are playing a role as well. Baby Boomers tend to be more optimistic than non-boomers as far as their overall views on the recovery. 43% of Baby Boomers now expect the economy to recover within the next year as compared to just 30% of non-Boomers. House pointed out, “Baby Boomers are the generation that did not plan, which makes it harder for them to adjust transition plans if they were preparing to retire, as small businesses don’t have the infrastructure and management teams in place to wait out a bad cycle.”
Based on the information collected by BizBuySell’s 3rd Quarter Insight Report and their survey, it is clear that there is a new wave of buyers on the horizon. The report supports the notion that the pandemic has made small business ownership an attractive option for new entrepreneurs. Factors driving new entrepreneurs into the marketplace include everything from being unemployed and wanting more control over their own futures to a desire to capitalize on opportunities.
Finally, House notes that 2021 could be a “perfect storm for business sales,” as 10,000 Americans will turn 65 each and every day. This means that the supply of excellent businesses entering the marketplace will likely increase dramatically.
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For every reason that a pending sale of a business collapses, there is a positive reason why the sale closed successfully. What does it take for the sale of a business to close successfully? Certainly there are reasons that a sale might not close that are beyond anyone’s control. A fire, for example, the death of a principal, or a natural disaster such as a hurricane or tornado. There might be an environmental problem that the seller was unaware of when he or she decided to sell. Aside from these unplanned catastrophic events, deals abort because of the people involved. Here are a few examples of how a sale closes successfully.
The Buyer and Seller Are in Agreement From the Beginning
In too many cases, the buyer and seller really weren’t in agreement, or didn’t understand the terms of the sale. If an offer to purchase is too vague, or has too many loose ends, the sale can unravel somewhere along the line. However, if prior to the offer to purchase the loose ends are taken care of and the agreement specifically spells out the details of the sale, it has a much better chance to close. This means that a lot of answers and information are supplied prior to the offer and that many of the buyer’s questions are answered before the offer is made. The seller may also have some questions about the buyer’s financial qualifications or his or her ability to operate the business. Again, these concerns should be addressed prior to the offer or, at least, if they are part of it, both sides should understand exactly what needs to be done and when. The key ingredient of the offer to purchase is that both sides completely understand the terms and are comfortable with them. Too many sales fall apart because of a misunderstanding on one side or the other.
The Buyer and Seller Don’t Lose Their Patience
Both sides need to understand that the closing process takes time. There is a myriad of details that must take place for the sale to close successfully, or to close at all. If the parties are using outside advisors, they should make sure that they are deal-oriented. In other words, unless the deal is illegal or unethical, the parties should insist that the deal works. The buyer and seller should understand that the outside advisors work for them and that most decisions concerning the sale are business related and should be decided by the buyer and seller themselves. The buyer and seller should also insist that the outside advisors keep to the scheduled closing date, unless they, not the outside advisors, delay the timing. Prior to engaging the outside advisors, the buyer and seller should make sure that their advisors can work within the schedule. However, the buyer and seller have to also understand that nothing can be done overnight and the closing process does take some time.
No One Likes Surprises
The seller has to be up front about his or her business. Nothing is perfect and buyers understand this. The minuses should be revealed at the outset because sooner or later they will be exposed. For example, the seller should consult with his or her accountant about any tax implications prior to going to market. The same is true for the buyer. If financing is an issue it should be mentioned at the beginning. If all of the concerns and problems are dealt with initially, the closing will be just a technicality.
The Buyer and Seller Must Both Feel Like They Got a Good Deal
If they do, the closing should be a simple matter. If the chemistry works, and everyone understands and accepts the terms of the agreement, and feels that the sale is a win-win, the closing is a mere formality.
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Only a small percentage of the population is able to go through life without using some form of financing at some point. Most people have little choice but to finance everything from their home and car purchases to their college education. Now, most business owners would love to receive an all-cash offer for their business. But the reality of most transactions is quite different. Owner financing is very common, and sometimes it is the only way to put a deal together.
Sellers have to be ready and willing to entertain the idea that they may, ultimately, be called upon to handle some aspect of financing if they want to sell their business. It surprises many to learn that if a seller is not willing to finance the sale, then buyers begin to worry and may even see this as something of a “red flag.” The reason for this is that many buyers feel that if a business is a solid investment, then the business will be profitable and repaying the seller should be no problem.
Buyers may worry that if a seller isn’t willing to help with financing there could be a “hidden” problem with the business. They may think this means sellers are “jumping from a sinking ship.” Sellers should keep this important aspect of buyer psychology in mind when deciding whether or not they are willing to finance.
Buyer psychology plays a major role in another aspect of seller financing and that comes in the form of collateral. Sellers may want to have some form of outside collateral to secure the loan on their business. While this may seem perfectly understandable to the seller, buyers can have something of a nervous response to this issue as well. Just as buyers worry that a seller’s refusal to provide financing is a red flag, buyers see the same red flag when sellers seek collateral. Once again, buyers think that if the business is healthy and thriving there should be no need for collateral. The buyer is left wondering, “What is going on here? How worried should I be? Why do they need collateral if this business is so great?”
Typically, buyers are “maxed out” when buying a main-street business. They are allocating most of their available funds to the down payment on the business. That means they will be unlikely to “push all their chips in” and gamble everything by also putting up the home, retirement funds or other collateral in the process. Sellers need to see the situation from the buyer’s perspective and remember that a collateral requirement could mean that if the business fails, the buyer could be left with nothing.
Navigating the complex interaction between buyers and sellers is no easy feat. It requires a careful balancing of several different skills, ranging from understanding finance to psychology. Working with an experienced business broker can help buyers and sellers connect and find workable agreements so deals can get made.
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Distressed businesses can represent a real and often overlooked opportunity for buyers, according to Howard Brownstein, President of The Brownstein Corporation.
Brownstein is an expert in providing turnaround management and advisory services to companies, as well as their stakeholders and is considered to be one of the world’s top experts in distressed businesses.
The recent economic downturn brought about by COVID-19 means that there will likely be a great deal more distressed businesses on the market in the coming months or even in the next couple of years.
However, not all distressed businesses are the same, Brownstein cautions. There is simply no way to know how bad things are for a given distressed business until one begins to “look under the hood,” and get a full view of what problems may lurk underneath.
Why is a Given Business Distressed?
Before you consider purchasing a distressed business, you absolutely must understand the core reasons for the distresses. Without a proper and detailed understanding of why the business entered a state of distress in the first place, it is impossible to clearly articulate why the business will potentially be valuable in the future. It is essential to be able to convey “what went wrong” and how the problems can be fixed.
Brownstein points out that while there are many reasons for a business to enter distress, two symptoms top the list. The first is cash flow issues, and the second is bad management. Often it turns out that the management was simply not rigorous enough. He also notes that companies will tend to blame external issues as a way to explain away their failure.
Of course, no two distressed businesses are failing from 100% identical causes. Brownstein suggests a series of questions that you need to ask when you begin exploring a distressed business.
- What is the business’ potential value?
- Is there something of value under the problems?
- Under better or different circumstances, could the business be viable?
These are all questions that your business broker or M&A advisor can help you to answer. It’s important to gain a clear understanding of the business’ past, present and future before deciding to buy a business.
Brownstein serves as an independent corporate board member for both publicly held as well as privately-owned companies and nonprofits. During his career, he has been named a Board Leadership Fellow by the National Association of Corporate Directors (NACD) and served as Board Chair and President of its Philadelphia Chapter. He also serves as Vice Chair of the ABA Corporate Governance Committee and has been named a Fellow of the American Bar Foundation. He has been a speaker at many of the world’s top universities including Harvard Business School and Wharton. Brownstein received his J.D. and M.B.A. degrees from the University of Pennsylvania.
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