Canada: Maintaining Confidentiality in the Sale Process

Last Updated: September 28 2015
Practice Guide by Duff & Phelps

Business owners are always concerned about maintaining confidentiality when selling their company. Significant consequences can arise where the market becomes aware that a company is being sold. Most notably, employees become concerned about their future, and good employees will sometimes leave rather than being faced with uncertainty. Customers also become concerned about whether the buyer will provide the same quality of service and support.

This newsletter addresses what business owners and their advisors can do to reduce the risk of a confidentiality breach before and during the sale process, and tactics for addressing a breach should it occur.


The discipline for maintaining confidentiality begins well in advance of the company being marketed for sale to prospective buyers. From the outset, the business owner and his or her trusted advisors must establish communication protocols. For example:

  • The sale process should be given a project name that is fairly generic (e.g.; “Project Scorpion”);
  • Secure email addresses should be used, possibly even personal email addresses (e.g.; gmail) rather than company emails;
  • Cell phone texts may be a preferred means of communication;
  • Meetings should be held off-site; and
  • Investment bankers and other advisors that visit the company should be instructed to identify themselves under a different firm name (e.g.; an insurance company)

There is a considerable amount of information that needs to be gathered when selling a business, including financial information, customer and supplier details, major contracts, and so on. Employees can become suspicious where voluminous requests for information are made in a relatively short time frame. Where possible, it is better to gather the information over an extended period of time and to have it gathered by individuals who are aware of the potential sale process, in order to limit the number of requests that are made to employees that are not in the loop.

One of the biggest issues that a business owner must address is when to tell employees about the contemplated sale process. In most cases, key employees need to be involved in gathering information, as well as in management meetings with prospective buyers. Buyers generally look to the quality of the management team as a key component of how much they are willing to pay, and even whether they are prepared to transact at all.

The risk to the business owner is that one or more key employees will get cold feet and search for alternate employment, often out of fear that they will be terminated following the closing of the transaction. The irony is that while key employees are worried that they will be terminated by the incoming buyer, most buyers are wary that key employees will leave!

There is no “one-size-fits-all” approach to dealing with key employees. The business owner and their advisors must carefully consider how to best approach the matter in each case. However, an approach that often works is as follows. The business owner has a confidential discussion with the key employees and informs them about the contemplated sale process. The owner can legitimately say that he or she does not know how the process will turn out; it could result in an outright sale, a private equity investment, a strategic investor for less than 100% or some other outcome. However, the owner can assure the key employees that they will be taken care of.

If key employees do not have a current employment agreement, then one should be obtained. In order to comfort prospective buyers, the employment agreements should ideally include non-solicitation provisions regarding customers and other employees of the company. Non-compete provisions for employees are rarely enforceable.

This usually means that the owner has to be prepared to give key employees something in return for their commitment. Compensation could be in one or more forms, including a:

  • parachute clause that includes an attractive severance package, should the buyer terminate the employee during a specified period of time following the transaction;
  • one-time bonus to reward the employee for their assistance in getting the transaction completed. The business owner should not underestimate the additional time and effort that key employees will have to endure to assist in the sale of the company; and
  • bonus pool that key employees can earn if they remain with the company for a specified period of time following the closing of the transaction. Such bonus pools are frequently three years in length, with payments made annually.

In some cases, business owners implement an employee share ownership plan (ESOP) as a means of aligning employee interests with their own, and to reward them upon the successful sale. While ESOPs can be an effective incentive mechanism, they are costly to implement and administer. Normally they are used where the business owner expects that the sale process will be several years away, rather than several months away.

Whatever means are used to align and reward employees, the business owner has to accept that there will be an economic cost, either directly (i.e. employees are paid out of the proceeds of sale) or indirectly (i.e. the buyer reduces its purchase price on account of the commitment to employees.) However, the business owner needs to weigh that cost against the risk and consequences of losing one or more key employees just prior to, or during, the sale process, which could result in a significantly lower sale price, less favourable deal terms, or even no deal at all.


The risk that a breach in confidentiality will occur is heightened once a company is exposed to the market and discussions with prospective buyers ensue. Further, the longer the sale process, the greater the likelihood that a breach will occur.

The first step in minimizing the risk of a confidentiality breach is for the business owner and their advisors to properly strategize how buyers will be approached. Specifically, the buyer universe may be restricted to avoid direct competitors becoming aware of the sale, which could result in the greatest damage. Where the business owner believes that direct competitors should be approached, it generally is best to approach other buyers first (e.g. those located in other countries, other industry verticals, etc.) in order to gauge their level of interest. Such buyers will normally take longer to get up to speed on the opportunity. Once there are other interested buyers, then direct competitors can be approached and given a short time frame. This helps to reduce the likelihood of a confidentiality breach and the resultant consequences should one occur.

The business owner and their advisors should carefully consider which buyers to approach. In most cases, it makes sense to take a “rifle approach” and limit the universe of buyers to those that likely have a sound strategic reason for investing. A “shotgun approach” to a wide audience rarely generates unexpected interest, and comes with significantly more risk of a confidentiality breach.

The investment banker should be the one who approaches potential buyers to maintain anonymity. The approach should be via direct contact (phone call or meeting) with a senior executive within the buyer’s organization (e.g. the CEO, CFO or Corporate Development Officer). Such individuals are generally more attuned to the importance and protocols of confidentiality. It also helps in developing a relationship with key decision makers at an early stage.

Buyers will typically ask for a “teaser”, which provides them with a broad overview of the acquisition opportunity on a no-names basis. The key is to strike a balance between providing sufficient information about the business to entice the buyer, while not being too specific to cause the identity of the seller to be known. In many cases, the teaser is modified based on the prospective buyer, where existing competitors are provided with a more generic teaser than buyers that are farther removed in terms of geographic area or industry vertical.

Interested buyers are asked to sign a non-disclosure agreement (“NDA”), which prohibits them from using the information that they receive in a competitive manner.  However, the seller needs to be cognizant that many buyers will resist signing an NDA that is too restrictive, as they may have existing customer relationships or be working on similar technology. In any event, an NDA only provides a limited amount of protection. It is difficult for the seller to prove that a breach occurred and, even if they do, the costs and time involved in pursuing legal action can be prohibitive. Therefore, the seller and their advisors must carefully control the dissemination of information throughout the sale process.

Once the buyer has executed the NDA, they normally are provided with a confidential information memorandum (“CIM”). The business owner and their advisors need to provide sufficient information in the CIM that allows the buyer to assess whether the company is a strategic fit and give them a sense as to value parameters. It should not include sensitive details such as customer names, profit margins for specific products, expense detail and so on. Many buyers will not have an interest in the business after reviewing the CIM (which is to be expected), so it makes no sense to have sensitive information floating in the public domain.

Buyers who express an interest in learning more about the business are given access to an online data room and the opportunity to meet with management. The data room includes significantly more detail regarding the business, so it’s important for the seller to be selective in terms of who is provided access. In addition, highly sensitive information (e.g. trade secrets) should not be disclosed at this time.

Management meetings can be particularly problematic. Such meetings should be held offsite, in a location where it is highly unlikely that an employee of the company would frequent. A considerable amount of time is required by the seller and key employees in preparing for and attending management presentations. This has to be managed carefully so that the staff does not get suspicious about why key employees are frequently absent all at the same time. In some cases, it’s best to hold the meeting on a weekend or after hours in order to reduce the risk of raising such concerns.

The investment banker should coach the seller and key employees about not disclosing highly sensitive information during the course of management presentations. In many cases, information can be provided in a cryptic form (e.g. disguising customer names) while still conveying key value parameters (e.g. a diverse base of repeat customers).

Highly sensitive information is provided after the buyer and seller strike a letter of intent. This reinforces the notion that the seller and their advisors need to “bet on the right horse” since it can be very damaging if a prospective buyer is provided with highly sensitive information and the transaction does not close. While an NDA may be in place and the buyer should destroy all of the information received, they will still remember important details regarding the seller’s business.

Caution is warranted when dealing with prospective buyers that have done few or no previous transactions. They often do not have protocols in place for maintaining confidentiality and may inadvertently do things that are harmful to the seller’s business. For example, if a would-be buyer conducts a LinkedIn search of the seller’s employees, those employees may become aware that their profile has been visited (and by who), which could result in significant issues. There is no harm in reinforcing the importance of confidentiality with all prospective buyers and asking them to limit the number of individuals within their company that are aware of the sale process.

Buyers normally request a tour of the facilities as part of their due diligence process. The seller and their advisors have to determine when this will occur (i.e. during business hours or afterwards) and any specific protocols (e.g. signing in under a different name, dress code, etc.) so as not to cause suspicions. It is entirely appropriate for the seller to ask the buyer to restrict the number of attendees.

Some buyers will ask to speak with key customers. While this step normally is done near the end of the transaction (after the letter of intent is executed), it can be very risky. The seller and their advisors need to work with the buyer to execute this undertaking with as little risk as possible. Some alternatives include having the seller contact customers beforehand to advise them of what is happening or engaging a third party firm to contact customers under the guise of a customer satisfaction survey.

Finally, it’s imperative that the business owner and the management team continue to focus on running the company throughout the sale process. This is not only important from the standpoint of avoiding suspicion among employees, but also to ensure that the company’s financial performance does not slip. Deteriorating financial performance during the sale process can have a significant negative impact on the price obtained or the terms of the deal.


The business owner and his or her advisors should proactively address how they will deal with a breach of confidentiality, should it occur. There are several possible approaches, which normally depend on what stage the sale process is at and the culture of the organization. The basic alternatives are to:

  • say something like “we are always being approached by potential buyers. It just shows that we are doing things right”. This approach is more common early in the sale process, where a possible transaction is still months away, if at all;
  • state that the Company is looking for a financial partner in order to help it achieve its growth objectives. While this may not be entirely accurate, in most cases the buyer is interested in helping the company to grow; or
  • admit that the company is considering its strategic alternatives, but reassuring employees and customers that a transaction will only be consummated if the right buyer is found that provides the continued quality of service and work environment that the business is known for. This approach is more common during the late stages of the sale process, after a letter of intent has been signed and a transaction is likely to occur. It normally is followed up with further frequent communication so that employees, customers and other key stakeholders feel as comfortable as possible.

You can also deny that a sale process is underway. But the risk is that the business owner will lose credibility once the company is sold.


Confidentiality before and during the sale process is critical in order to avoid potential issues with staff and customers. Proper planning includes the use of communication protocols and arrangements with key employees. During the sale process, emphasis needs to be placed on working with a finite universe of buyers and controlling the flow of information to reduce the likelihood and consequences of a breach. Should a breach occur, the business owner needs to be prepared to address it promptly and in a manner that serves to curtail any adverse consequences.

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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