Loose Lips Sink Ships

 

This idiom is a reminder sharing information carelessly can lead to unintended consequences. It’s a warning to be cautious about what you say, especially when it comes to sensitive or confidential information. The process of selling your business requires careful preparation and execution. Confidentiality in private M&A is paramount in establishing and maintaining trust between parties. The fundamentals of confidentiality serve as the foundation for the successful execution of a business sale. The exchange and sharing of sensitive information between parties is inevitable, and maintaining confidentiality ensures all data is protected from competitors and the public.

 

“Loose Lips Sink Ships” – War Advertising Council 

 

A business that enters the market could cause certain customers to reconsider their relationship with the company, but an NDA helps prevent this by keeping the sale under wraps. Often buyers view an NDA as one-sided and solely benefiting the seller. However, the buyer also benefits from many of the protections the NDA affords. Potential buyers who are not selected to purchase the business, or may be a competitor, are bound by the NDA. This means even though competitors may know some of the inner workings of the business, the new owner’s information is still protected.

 

Who Does What?

Investment bankers and advisors have a standard template for establishing confidentiality and hundreds of thousands of examples exist. There are specific minimums to be defined as to what constitutes confidentiality. Simply put, if you must ask, then it’s likely confidential because its data is involved in a case. There will be inclusions and exclusions as to what is confidential and what restricts the use of confidential information.

There are obligations on behalf of the buyer as to how they treat information and the shall-nots. There are standards of care in the context of confidential information relative to the level of attention and precautions the recipient must take to protect sensitive data from unauthorized disclosure. The management of confidentiality often involves using reasonable efforts to ensure its information is not misused or shared improperly.

 

Terms & Conditions

There are numerous terms and conditions in an NDA from length or tenure, enforcement, law and jurisdiction, dispute resolution, remedies, and how information shall be returned to the seller. One example is permitted disclosures of confidential information typically includes situations where disclosure is required by law or regulation, or when both parties agree to the disclosure during the period. Confidentiality obligations often last for a specific period of time or until the information is no longer considered confidential.

The NDA will also detail the shall-nots such as information is only to be used for purposes described in the agreement, to make reasonable and appropriate efforts to keep the information secure and only those on a need-to-know basis for evaluating the case need to know, etc. Those NTKs shall abide by the obligations restricting use and disclosure and don’t share the information with third parties, unless required to by law.

The need-to-knows are also responsible for reasonably safeguarding all information they receive. They are obligated to notify the disclosing party of any leaks of the disclosed information (uhh-oh; see Breaches), comply with all government rules and regulations, don’t reverse-engineer or decompile the information and cease using the information and return it to the disclosing party upon termination of the NDA.

 

The Mechanics of Confidentiality

The advisor will negotiate confidentiality agreements with potential buyers to ensure the information, and the seller’s interests, are protected.  Certain confidential information is only shared as specific milestones are reached. Potential buyers are screened to ensure they are qualified before sharing information with them, controlling the flow of information, and limiting access to sensitive data. Examples of such data include financial information, strategic plans, customer lists, supplier lists, timing, sale price, and any other data that could potentially impact the value of the business or give competitors an advantage.

1133. Some sellers are creatively competitive and prefer a more covert approach from us such as using code names and language to keep unwanted ears at bay…yes, we have used “Blue Horseshoe likes Endicott Steel.” When a code name is used it prevents potential buyers from discovering the business’s identity also, and if that’s what keeps Mr. George happy then by God we’re there! Business cases as important as someone’s life’s work will typically be smoother and more successful when information is kept confidential. (only squids will understand 1133)

Access. Limit the number of people who know about the sale. Only a select few people are to know about the deal aka “under the tent” including the owner and the Deal Team. It may be necessary where certain employees need to be involved in the process. They will be the NTKs and having them sign a non-disclosure agreement is obligatory.

We restrict access to sensitive information using a proprietary bank-grade encrypted VDR virtual data room. Only sharing sensitive information with screened potential buyers who have signed an NDA. It’s essential we limit the information provided to what is necessary to evaluate the business’s value. Our VDR includes access controls tracking what has been looked at and when, what can be printed and by whom. It’s a great tool once we open diligence.

Comms. We take online communications very seriously. By using fully encrypted emails with individual account level permissions allows full control over sensitive data at any time. While no platform is impenetrable against hackers, our platforms and company network has not experienced any sensitive information leaks.

Employees. We expect our clients to monitor their employees access to information and communication to prevent leaks or accidental disclosures. If employees have access to your calendar, then making private calls and meetings about the sale are expected.

Timing. We also control the release of information once the deal is final. There is a time and a place to share with the public and even then it isn’t necessary to share everything.

 

What Happens If Confidentiality is Breached?

In a clean case there will be no breaches of confidentiality, and not every case is clean for one reason or another. It would be naive to say it doesn’t occur. If sensitive information were to be compromised, the breach may diminish the value of the business being sold. A breach can also harm the reputation of the company involved. A loss of trust may lead to damaging relationships or ill will amongst those involved. It’s a negative spiral for those directly and indirectly affected. Competitors may use this data to take advantage of the situation and leverage a strength, weakness or opportunity to capitalize on the disclosed information.

A premature or incorrect disclosure may lead to buyer hesitation, delays or worse. If confidential information is leaked, the affected party will likely take costly legal action; especially true when third parties suffer due to the breach.  Such breaches will invariably incur additional diligence, legal remedies, increase additional unnecessary layers of complexity to the negotiation as well as extended timelines, increased costs, deal fatigue, or worse. For example, when sensitive financial data or an operational weakness is disclosed, a potential buyer may lower their price due to perceived risks.

A critical part of any business sale is retaining key employees.  When employees find out the business is for sale, they are often concerned about their livelihood and may start looking for other employment. Should the employees find out the sale price of the business, they may feel entitled to some form of compensation or share of the profits. Unfulfilled needs lead to hurt feelings, disgruntled workers and an environment of toxicity. Any disruption to key personnel throughout the case will negatively impact the sale of the business.

 

Risks of Breaches

Confidentiality breaches can have severe consequences, including:

Consequence	Description
Deal Destabilization	Leaks can undermine negotiations and erode trust among stakeholders.
Loss of Competitive Advantage	Competitors gaining access to sensitive information harming business value.
Damage to Reputation	Ties to a failed deal can affect investor confidence and market perception.

 

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Best Practices 

 

⦁       Select one senior member of the team as lead confidentiality officer (CO) to oversee the sale process and ensure that sensitive information passes through them.  Depending on the size and complexity of the business case, a small team may be required for larger enterprises. In many cases, JSP will take the lead for all communications.

⦁       Use of secure channels of communication, such as encrypted email, the VDR or similar secure portals are required as directed by the CO. Prior to entering the market, our clients are directed to organize, consolidate and store all sensitive data in a secure location with access control levels.

⦁       Timing and limits of information to be shared and controlled to thoroughly vet potential buyers who’ve signed NDA. As the case approaches contract stage, more sensitive data shall be released as deemed. Limit your country club conversations…we learned this the hard way!

 

Let’s wrap up, Keeping the sale of a business confidential is crucial to protect its value, reputation, and operations. Sellers need to take several precautions to maintain confidentiality, including limiting access to information, privatizing calls and appointments and controlling the release of information. Business owners can ensure a successful sale while minimizing any potential harm to the business by establishing and maintaining confidentiality.