Data Privacy in Business Sales: Protecting Information During Due Diligence
When a company goes up for sale, so does its data. From employee records to customer lists, due diligence when selling a business often requires sharing the very information most companies spend years trying to protect. With the California Privacy Rights Act (CPRA) tightening restrictions on how personal data is handled and attorney generals increasing scrutiny of sloppy disclosures, the risks now go beyond just reputational damage.
Even if you’re selling a business outside of California, such as an ice cream shop in Rhode Island, California’s laws may still apply. If a California resident buys a gift card online, joins your loyalty program, or subscribes to your mailing list, your business could be subject to CPRA requirements. Because of this, many businesses nationwide follow California’s standards to stay compliant and protect consumer data.
This article explores how businesses can navigate due diligence without compromising consumer rights, triggering a data breach, or disclosing more information than necessary.
Data That Needs Protection During Business Sales
Selling a business requires transparency, but mishandling sensitive data can expose you to legal and financial risks. Here’s what you need to protect during due diligence.
- Customer Information: This includes consumer data such as names, phone numbers, Social Security numbers, and credit card info. Even social media interactions and biometric identifiers can fall under the definition of personal information.
- Employee Records: HR files, payroll data, and other personal details are often collected and stored without strict limits. Limit access, encrypt files, and disclose information only when absolutely necessary.
- Financial Data: Bank details, tax returns, and vendor contracts are prime targets during data collection. Only share through vetted service providers or secure data rooms that track access and prevent leaks.
- Business Operations: Trade secrets, SOPs, and contracts are your business’s competitive edge. Disclose them gradually, and use NDAs, watermarking, and tight control over who sees what.
Privacy Laws
Buyers will review your data handling practices, and violations can halt deals or trigger penalties. Here's what to know.
- Federal Regulations: If your business handles personally identifiable information in sectors like healthcare or finance, federal laws apply. Health Insurance Portability and Accountability Act (HIPAA) governs patient data, while the Gramm-Leach-Bliley Act (GLBA) regulates customer data in the financial services industry. Both require strict data security and limit how data processing can be performed.
- State Privacy Laws: States like California and Colorado have set the tone for U.S. data privacy laws. The California Consumer Privacy Act (CCPA) grants California residents rights, including the ability to opt in for data sharing, request deletion of their data, and opt out of data sales.
- Industry-Specific Requirements: Depending on your business purpose, you may fall under other privacy regulations. Companies operating internationally must also comply with the General Data Protection Regulation (GDPR), the gold standard for data protection laws in Europe.
Due Diligence
You’ll need to provide information for buyer due diligence, but that doesn’t mean handing over your entire dataset up front. Buyers must verify the health of the business, including financial performance, customer relationships, employee structure, and operational stability. Much of that involves sensitive personal information and proprietary processes that must be handled carefully to avoid risk or regulatory breaches.
A smart approach is to phase the information release. Early in the process, use high-level summaries or redacted documents to give necessary insights without providing full records.
For example, instead of sharing a full customer list, offer metrics on churn rate or average lifetime value. Instead of full employment files, provide an anonymized org chart and role descriptions.
Detailed data should only be disclosed after serious intent has been established and the deal is close to final negotiations. Even then, limit access to secure data rooms and log activity. This ensures you're meeting the buyer’s need for clarity, while still keeping your data protection obligations.
Legal Protections
Before sharing anything sensitive, it’s important to have legal guardrails in place. A thoughtfully drafted NDA sets expectations early and outlines exactly how information can and can’t be used. To add another layer of safety, include data use restrictions and non-solicitation clauses to prevent the buyer from poaching your team or leveraging customer data.
It’s smart to include confidentiality terms directly into the Letter of Intent (LOI) to keep early discussion protected. You should also prepare a Confidential Information Memorandum (CIM) to share key details safely with serious buyers. And if the deal falls through, a clear rule about the return or destruction of shared data helps prevent it from ending up in the wrong hands.
Best Practices for Information Sharing
Virtual data rooms (VDRs) are now standard for serious buyers and sellers. Email chains and cloud links have led to high-profile leaks. VDRs offer better security with tiered access, tracking, and alerts.
Before uploading, companies should redact fields like home addresses, Social Security numbers, and medical details. Financial buyers, especially financial institutions, often ask to view redacted data first, then only get full access after NDAs and risk reviews are complete.
You can also set time-limited access for each user and role. For highly sensitive materials, consider supervised document review, either in a secure VDR with screen capture disabled or in-person with an advisor present.
Red Flags and Warning Signs
Even in a promising deal, certain red flags should make you pause.
- Overreaching data requests: Be cautious if a buyer pushes for full access to user data or types of information beyond what's needed. This can signal poor privacy practices or intent to resell data.
- No NDA agreement: A buyer who refuses to sign an NDA is dismissing basic privacy protection. Without it, sale of personal information could expose you to legal risk without valuable consideration.
- Competitor masking as buyer: If a competitor expresses interest, but quickly pivots to sensitive functions, pricing models, or customer data, pause. Even if they cite exemptions or claim business purpose, their real motive may be to act like data brokers, not buyers.
Take Control of Your Business Sales With BizBuySell
Whether you're listing a business or buying one, BizBuySell helps you do it right. With access to trusted brokers, and tools to support secure transactions, BizBuySell keeps your deal on track.
Visit BizBuySell to find brokers, tools and advice, and buyers, all in one secure place.