In most divestitures, the seller wants to keep things confidential for a variety of reasons. The seller also wants to get the highest price possible. As the illustration shows, these two objectives
will often conflict. A seller can’t have it both ways. If you want to keep something secret, don’t tell anybody. But if you want to sell a business for top dollar you obviously have to talk to a num-ber
of people, including potential buyers and some of your own employees. In the article
that follows, we will discuss how these conflicting objectives are sorted out in the context of a sale of a chemical business.What kind of tradeoffs are made between maintaining confidentiality and getting the best price? The answer depends on two factors: (i) what is it that you want to keep confidential?; and (2) who is the potential buyer you are talking to?

What information needs to be kept confidential? Some of the typical things that a seller may want to keep confidential in a divestiture:
• The fact that the business is for sale
• Financials
• Customer lists
• Formulas

What types of buyers could a
seller be talking to?
• Competitors
• Customers or Suppliers
• Industry players who are not competitors, suppliers or customers
• Financial Buyers

The fact that the business is for sale - Most of the time a seller will want to keep confidential the fact that a business is for sale or might be considered for sale. The seller’s concern here is that if word gets out, most of what can happen is bad. Employees can be distracted from running the business, causing earnings to suffer. “...loss of confidentiality is virtually inevitable, in some fashion, at some
time, in all divestitures, despite all the precautions taken. Sellers need to be prepared for this at the outset.” Employees may also start looking for new jobs. Competitors can use the fact that the business is for sale as a selling tool, to entice customers to change suppliers. Competitors also may try to raid the selling company of its best people. And customers can also get nervous, with or without a competitor’s prodding. What is a seller to do? A strong confidentiality agreement is a must in any divestiture. But as a practical matter, it is not enough, particularly when dealing with a potential buyer who is a competitor, as opposed to a financial firm. A few things can be done:

• Limit the number of people from the buyer’s side that are involved in the process.
• Provide only general, less sensitive information (discussed below).
• Move quickly and get a non-binding offer first to see if further discussions and
detailed disclosures are warranted.

Employees - Key employees of a business will be needed in a divestiture, both to assist in putting together the relevant information as well as to help sell the business in due diligence. Consequently, it is important that they have an incentive to stay with the company, keep things quiet and help in getting the best price. Special compensation packages geared to these objectives may be necessary. It is normally not prudent for a seller to involve more than this small group of employees in the divestiture process since the company grapevine can very quickly spread word of a pending deal. The more employees in the loop, the more active the rumor mill.

Financial Information -Financial information may or may not be sensitive, depending on who the potential buyer is. Care must ordinarily be given when dealing with competitors. With competitors very often all that is needed in the initial stages may be summary sales and maybe gross margin infor-mation, without any product
line breakdowns. With potential buyers who are customers or suppliers, care also must be given. A customer who sees your financials may not buy the business, but thinking your profits are too high may try to cut the price they are paying for your product. Suppliers may similarly end up not buy-ing
the business, but after seeing your level of profitability may try to increase their price to you. And since the chemical industry is such a small world, where two companies can be competitors,
suppliers and customers at the same time, a seller needs to assess how all of these relationships could be impacted by the disclosure of confidential information in a divestiture. If things proceed and the buyer seems genuinely interested in the business at an attractive price, there will be a need to provide further detail. But not until then. Dealing with financial buyers is another matter. With financial buyers, full and complete disclosure of financial information in the beginning may carry little risk.

Customer Lists - This information can be very sensitive. In most cases, it is also the type of
information that a buyer does not need at all, or at most not until the 11 th hour, when closing is imminent. Consequently there is normally not a problem not disclosing this information in the beginning. If there are one or two large customers or a high degree of customer concentration,
the seller will need to be prepared to disclose this information and risk a loss of confidentiality,
but only at a very late stage in the process.

Formulas - In the chemical industry, this information also can be very sensitive. It is a very rare case when actual formulas are given to a potential buyer prior to closing. Financial buyers by definition would not know what they are looking at and other buyers that would be knowledgeable, such as competitors or other industry players, will almost never have any legitimate reason to ask for this information. Consequently, formulations should never be disclosed in any divestiture except under the most unusual circumstances and without strong legal protection.

Rule #3. One final comment. In addition to the two rules on page 1, there is a third, very important rule that also bears mentioning, and that is that the ability to maintain confidentiality diminishes with the passage of time. The longer the divestiture process takes, the more that will be leaked. In fact, loss of confidentiality is virtually inevitable, in some fashion, at some time, in all divestitures, despite all the precautions taken. Sellers need to be prepared for this at the outset.