Protecting your company secrets in a sale
Friday, May 16, 2008/
You need to show the goods to make a sale, but at the same time you don’t want to give away your value-creating edge to competitive shysters. TOM McKASKILL reveals the safer way
By Tom McKaskill
You need to show the goods to make a sale, but at the same time you don’t want to give away your value-creating edge to competitive shysters. There is the safer way.
Many entrepreneurs are wary of giving away company secrets during a due diligence process involved in selling their business. Their fear is that that the potential buyer will pull out and then use that information to compete against them.
Since most firms don’t have the luxury of unique, patented or protected assets or processes, this is a very reasonable position to take. Imagine how foolish you would feel if you gave away the very competitive advantage that had created the sale value.
However, you still need to get through the due diligence process for the honest buyer.
What you need to do is to balance the need of the potential buyer to be able to assess the quality and impact of your confidential information with your desire to not give away the store to the dishonest scavenger.
To do this you need to have a process that gets rid of the latter but keeps the former in play. But how much can you provide to satisfy the serious punter while still protecting yourself against the dishonest or opportunistic competitor?
Your best protection against the theft of confidential information during the sale process is to be very well prepared for the due diligence investigation. This information can then be released in stages, subject to your own due diligence on the potential buyer.
You should be looking for commitment from the buyer at each stage of the investigation. Buyers who are only fishing will not want to spend much effort in the process and will soon fall away.
You should balance their effort with your own. Thus, as they require meetings with management, you should request similar meetings with theirs. As they require more detailed information, you should request similar data from them. If they are not prepared to share information, you can probably assume that they are not serious and terminate the discussions. You can also have them sign a non-disclosure document with damages for use of confidential information.
Your second level of protection is to withhold sensitive information but have it examined and verified by an independent and credible third party. Thus you can cite performance data, market statistics and forecasts but hold back the detail. This data would then only be released to the successful bidder as a final condition of the sale but could be done in such a way that, if validated, the sale would then be concluded.
Your best strategy, however, against this type of invasion is to have pre-selected the potential buyers. If you have determined that the potential buyer has a real need for your business, is capable of funding the acquisition, and has the capability and capacity to make it work, then you should be dealing with genuine buyers who would rather buy than copy.
By ensuring you have several willing potential buyers, and that you are well prepared for due diligence, you can also speed up the sale process and dramatically reduce the exposure period.
In the end you will have to take some level of risk to get the deal done. But with some investigation you can determine the ethical values of your potential buyers.
Just make sure you steer clear of the doubtful ones.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.
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