The Middle Market Review Insights on the Middle Market.

Subscribe Subscribe

Subscribe Today

I want to receive:

Thanks for subscribing!

Advisors, Private Equity

Maintaining Confidentiality in M&A


It’s the ultimate dealmaker’s paradox: that special something that makes a business valuable and attractive to investors is also a matter of utmost secrecy. As a seller or buyer looking to take a business to the next level, how do you share and scrutinize the inner workings while keeping things under wraps? Integrity and trust go a long way, but sometimes are not enough to keep a prospective deal confidential.

Confidentiality is key — even in a seemingly sweetheart deal — because the leak of proprietary and non-public information can be devastating for a business. It’s not simply about protecting trade secrets or data on profit margins; the mere rumor that a business is on the block can have vast repercussions. Creditors, customers, employees and suppliers all get uneasy at word of a sale. It is also emboldens competitors to poach talent as well as clients.

Plus, confidentiality is not strictly about maintaining secrecy. It signals that a sale is sophisticated and professional, where the process is controlled, the outcome more assured.

Some claim that confidentiality can prove too much of a good thing, smothering the grapevine that helps create a more competitive market, driving up prices.  However, certain studies have shown otherwise, finding that leaked deals not only fail more often but that they also carry lower premiums.

Start Smart

For business owners, working with experienced intermediaries, such as an investment banker or M&A advisor will minimize the risks at the outset. Embracing advice and process rather than seeking shortcuts or fast-track outcomes can help ensure a sale runs properly from start to close, and advisors can help anticipate issues that may arise along the way. A deliberate process begins with a so-called teaser, a one-page summary of the business that is substantive enough to attract serious buyers but opaque enough to safeguard its anonymity.

While it seems self-evident, some business owners need to be reminded to keep any talk of a potential deal hush-hush. Leaks are not always intentional or nefarious, but can happen by accident. The news should not extend beyond the inner circle: the spouse, the lynchpin executives, the attorney, the CPA.

NDA: Letters to Live By

No matter how decorous it seems, there is no implicit secrecy in deal negotiation. It must be formalized. Without a confidentiality agreement, or a non-disclosure agreement (NDA), disclosures made as part of the sales process are free for use. Ultimately, paperwork cannot itself prevent a breach, but at the very least it establishes accountability and forces all parties to take discretion seriously.

As a general rule, suitors should be screened in advance to streamline the sale, maximize resources and minimize the chance of an inadvertent leak. Once credible potential buyers emerge, out comes the NDA. The contract not only ensures that sensitive information disclosed by the seller — whether related to financials, intellectual property, workforce, customers and suppliers — will be kept secret, but also keeps the sale itself under wraps. That is perhaps the most important provision. It’s not a fail-safe precaution, but going without is naive or reckless — “This conversation never happened,” is not a winning strategy.

Keep It Privileged

Like most aspects of a deal, the NDA often involves some back-and-forth with a prospective buyer. Nobody wants to expose themselves to liability, assume onerous constraints or divulge more than is necessary. That being said, the contract should not be a major source of contention, more a deliberate procedural step.

Sellers often hold the pen on the NDA because they tend to be the ones laid bare, but it is not always a one-way street. Investors may well want to protect information they pass to a target and push for a more symmetrical contract, where both parties are restricted from disclosing particulars. However, before undertaking mutual obligations — and potential liability — sellers and buyers alike should determine whether the information in fact crosses into confidentiality. Is it proprietary and non-public? Information that is available to the public, even if little-known or arcane, does not qualify for protection.

Even with the confidentiality agreements inked, it is best not to reveal everything at once. Instead, stagger the disclosures as needed, withholding the more sensitive information until later in the process. Inexperienced sellers often divulge too much information prematurely, either to charm an investor or buyer, to create rapport or to keep pace with fast-moving negotiations. However, there is no advantage to this “open kimono” approach. The best approach is to make disclosures in a balanced and gradual way that will build towards a sale. For instance, hold back on the most significant disclosures until certain milestones, like a letter of intent or an offer is in play.

Of course, there are endless variations and customizations to any legal document, but sellers often include a provision to prevent would-be buyers from poaching employees in the wake of a failed buyout. It’s a nightmare scenario for a business owner: Rather than a successful and rewarding sale, you are forced to get back to business without vital personnel. A so-called standstill provision helps preempt a talent raid by a competitor.

The NDA’s chief role is to establish confidentiality for a specific duration. However, an effective contract does more to establish the groundwork for a deal. Ultimately, an NDA can foster trust rather than merely outline liabilities, setting the right tone for a successful deal.

Virtual Lockdown

The most effective way to maintain confidentiality is to control the flow of information. As a practical matter, limiting the dissemination of sensitive documents can be the best prophylactic. In this day and age, documents can proliferate and fly away at a keystroke.

It is standard practice for law firms, investment banks and M&A advisors to host sensitive information in virtual data rooms (VDRs). These online deposit boxes defend against hackers as well as human error by granting limited access to select individuals who can view but not copy documents. A secure dataroom also enables you to closely monitor each click, every turn of the page.

M&A deals are fast-moving and founded on trust, but that does not mean that certain measures should not be taken to ensure that closely guarded information stays secret. In fact, confidentiality need not encumber the process or breed suspicion. If anything, a mindful and straightforward approach will not only protect disclosures but ultimately facilitate a deal, bringing a heightened focus and calculation to the proceedings.

Learn More About Joining Axial

Request Information

Subscribe to Middle Market Review

Subscribe to Middle Market Review

Subscribe Today

I want to receive:

Thanks for subscribing!