Confidentiality in M&A Deals

Confidentiality in M&A Deals

Matt Gilbert

January 31, 2025

Confidentiality breaches in lower-middle and middle-market mergers and acquisitions (M&A) can have significant consequences, impacting deal value and business operations, as well as weaken stakeholder, employee, customer and vendor trust. For business owners with revenue between $5M and $100M annually, understanding the risks and strategies to mitigate breaches of confidentiality is essential M&A 101. In this month's edition of GaP Insights, we explore the critical role of confidentiality for sellers in M&A transactions. We conclude by emphasizing the importance of choosing the appropriate transaction advisor and sale pathway to successfully meet exit objectives.

The Pros of Confidentiality in M&A Deals

  • Stability: Maintaining confidentiality prevents the unnecessary unsettling of employees, customers, vendors and even landlords and other stakeholders which could lead to business disruption and devaluation.
  • Competitive Advantage: Safeguarding sensitive information—such as pricing data, customer lists, employee resumes and intellectual property—ensures competitors cannot exploit your strategic plans through the use of data gathered for M&A transparency purposes.
  • Trust Building: Confidentiality fosters open communication between buyers and sellers, enabling smoother negotiations and fostering stronger relationships.
  • Regulatory Compliance: Adhering to confidentiality agreements aligns with legal requirements, avoiding penalties and other consequences resulting from unauthorized disclosures.

The Cons of a Confidentiality Breach

  • Reputational Damage: Leaked information can damage the public, employee, vendor and professionalism perceptions of both buyer and seller, eroding trust among stakeholders.
  • Deal Disruption: A breach can derail negotiations killing or at best delaying the transaction due to heightened scrutiny or legal challenges.
  • Financial Impact: Disclosure of sensitive data can reduce the value of the deal, can move guaranteed funds to contingent buckets and can increase acquisition costs due to speculation of long-term consequences.
  • Loss of Competitive Position: Competitors gaining access to proprietary information may undermine your business strategy and cause buyers to factor resulting erosion into their offers.

 Risks of a Confidentiality Breach

  • Unintentional Consequences: The most common breaches are those resulting from weak security and vetting practices by M&A professionals. There is a wide variation in the security practices employed in the lower-middle and middle-markets. Be sure to align with a transaction advisor who prioritizes layered security     measures in their processes.
  • Cybersecurity Threats: Hacking or malware attacks on deal-related technologies can expose sensitive data.
  • Regulatory Penalties: Violations of privacy laws can result in hefty fines, such as those under GDPR or other regional regulations when selling to public companies and buyers under similar legal constraints.
  • Legal Liabilities: Breaches may lead to lawsuits from affected employees, customers, or partners whose data was exposed.
  • Operational Fallout: Leaks can strain relationships with employees, customers and suppliers, leading to internal instability during a critical transition period.

Mitigating Confidentiality Risks

To minimize risks, companies should adopt robust M&A confidentiality strategies.

  • Non-Disclosure Agreements (NDAs): Customized NDAs set clear boundaries on how confidential information is shared and managed.
  • Non-Circumvent and Non-Compete Agreements: Unfortunately, these specific documents are less likely to be used by M&A professionals unless you force them to be used. They protect a business owner from having employees poached and competition created or increased through actions taken on information that was meant to be part of buyer evaluation material. 
  • Secure Data Sharing: Use encrypted online data rooms and secure communication protocols during the entire marketing and due diligence processes.
  • Cybersecurity Measures: Implement strong cybersecurity controls to protect sensitive deal-related information from breaches.
  • Comprehensive Due Diligence: Thoroughly vet the buyer’s or seller’s privacy practices to identify potential vulnerabilities before closing the deal.

  

Why Choosing the Right M&A Advisor Matters

A skilled M&A advisor is instrumental in mitigating confidentiality risks.

  • Process: Advisors must incorporate layers of confidentiality awareness into every component of the M&A process. Any slip can derail a transaction and cost a seller a significant sum. 
  • Risk Identification: Advisors with expertise in lower-middle and middle-market transactions can proactively identify existing vulnerabilities and recommend solutions.
  • Tailored Strategies: They ensure NDAs and other agreements are customized to protect your specific interests while maintaining compliance with legal standards.
  • Cybersecurity Expertise: Advisors often have access to secure platforms and protocols for managing     sensitive data throughout the transaction lifecycle.
  • Conflict Resolution: Experienced advisors help navigate disputes or disruptions caused by confidentiality breaches, ensuring smoother negotiations.

By selecting an advisor who understands you and your individual exit objectives, you gain a partner who prioritizes your interests over generic solutions offered by larger firms focused on volume. This tailored approach reduces risk while maximizing deal value. In summary, confidentiality is not just a best practice but a key cornerstone of successful M&A transactions. While breaches pose severe risks to valuation, reputation, and operations, choosing the right transaction advisor ensures these pitfalls are minimized allowing you to focus on achieving your strategic goals with confidence.

If any of this resonates with you, we encourage you to complete our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.

Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle and middle market business owners from coast to coast through representation for Mergers & Acquisitions Matt Gilbert and Bret Pardue established GaP to provide owners of privately-held businesses – those businesses generally enjoying annual revenue of $10-$100 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.

Join hundreds of other business leaders and owners in the know. We regularly share lower middle and middle market insights and educational content aimed at helping business owners plan and navigate successful exits or partnerships.

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