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Information for Sale of Business

Hi Metro Law

I have a small commercial cleaning business. Last week I was approached by a potential purchaser. The purchaser has asked for a whole lot of information on the business, some of which I am hesitant to divulge. How should I deal with this?
Thanks in advance, Stephen

Hi Stephen,

During the initial discussions regarding the sale of your business, it is inevitable that certain information of a confidential nature will need to be disclosed by you to the potential purchaser. You will during the negotiation process likely be disclosing information regarding financial performance, customers, business secrets, lease details, and suppliers.

The simple answer is to have a confidentiality or non-disclosure agreement that sets out clearly the obligation on the potential purchaser to any information provided confidential and not to use that information for any improper purpose.  This agreement should also set out clearly the consequences of breaching the agreement.  However, there are some other considerations take into account.

First of all it is worth considering what information that you need to provide the purchase in order for them to decide whether they want to purchase the business and whether it is economic for them to do so.  Often this information may be provided by your accountant and it may be possible to summarise this information in a way that may still be useful to negotiate an agreement and a price without providing too much sensitive information about the business.

Engaging in a due diligence process can distract you from the operation of your business and can be expensive.

Details of your long established customers and especially your key employees should not be given out lightly.  It can be alarming to both if you appear to be shopping the business around to a number of potential purchasers.  I have seen a business lose a key client while the owners squabbled about who was to buy the business.

The more sensitive information such as the details of your key customers and suppliers should probably be held back until a later stage of the due diligence process once you are satisfied that the purchaser is keen to go ahead and has the financial wherewithal to proceed.  As a vendor you also want to be satisfied with the purchaser’s ability to run the business successfully.  Ideally you would want the purchaser to have confirmed any finance condition and have paid the deposit on the purchase before providing with them with more sensitive information.

A written confidentiality agreement protects your business value by imposing an obligation of confidence on the purchaser. The agreement would be able to clearly set out what the confidential information is, the limited circumstances the recipient is permitted to use the information and the consequences of a breach of the obligation of confidence. The confidentiality agreement translates the duty of confidence from a vague expectation into a contractual obligation. Having a potential purchaser sign a confidentiality agreement also creates a psychological obligation on the recipient to respect and keep confidential the information that you disclose to them during the negotiation process.

If the confidentiality agreement is clear about what information is confidential and the obligations on each party, you would be able to point to a clear breach of a contractual obligation should you wish to seek damages such as an account of profits or injunctive relief. Without a written contract you would be relying on a mere duty of confidence which would be far harder to establish.

Please do not hesitate to contact Metro Law should you require any advice in regards to the sale of your business or the drafting of a confidentiality agreement to protect your interests.

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