Confidentiality in the M&A Process

A confidentiality agreement is typically the first official agreement entered into by the parties considering a potential merger or ac­quisition. While seemingly straightforward, the issue of confidentiality is often critical to the success or failure of the transac­tion. Both buyers and sellers have several key reasons to be concerned about confidentiality, including client/customer and employee reactions, market intelligence, and competitors.

While confidentiality agreement is typically the first agreement signed, the importance of confidentiality starts when the seller decides to pursue a sale.

The following are key points for confidentiality in the beginning of the M&A process:

Limiting exposure early on is key.

Before signing a confidentiality agreement, a seller has to make it known either directly or by listing on a site like DealZumo that they are considering selling.   Sellers, or their advisors, typically prepare a “teaser” that provides an overview of the company without revealing the company’s name.  Then they distribute it to a potential buyer list.  The seller or advisor qualifies the interested parties and then has them sign a confidentiality agreement.  This qualifying step ensures the seller is only talking to serious buyers and is maintains control of the process.

Avoid premature disclosure.

As mentioned above, it is necessary to disclose certain information about the seller’s business in order to have productive conversations with potential buyers.  However, sellers have significant motivation to avoid the premature disclosure of certain information that might do irreparable harm to the business if the transaction does not close or if they do not decide to sell. Failing to manage the release of information or preparing for the inevitable rumors surrounding a deal can result in several unfavorable consequences.  Typically, after the first conversation the main information a buyer needs is more detailed financial statements and 2-5 operational or clinical data points, depending on the industry segment.  If a productive dialogue continues, then the next stage of information sharing can continue.

Maintain confidentiality throughout the transaction.

Confidentiality does not stop with the introduction of the selling company to one or multiple buyers at the start of the acquisition process.  Protection of confidentiality continues through the transaction process all the way through the closing of the potential deal.  This requires some give and take from both the buyer and seller.  The buyer needs information so they verify what they are buying. The seller wants to be assured that the transaction will close, but they also want to make sure the market or their employees do not find out until the right time.  Protecting confidentiality during this stage of the transaction requires a firm hand on the seller’s part where appropriate, but a willingness to compromise as the potential buyer hits various milestones.

If a transaction is being managed properly, weekly calls between the buyer and seller will take place to update each side on the progress of the transaction.  Part of the weekly agenda should be a discussion of confidentiality issues that might develop in the coming week.  This reminds the buyer that confidentiality is important to the seller and addresses how to proactively handle specific areas of concerns before they occur.

Ensuring confidentiality in the M&A process is key for a successful deal. While deals typically do not suffer from too much discretion, managing and protecting information appropriately can ensure a controlled process throughout the transaction.