Potential buyers have the opportunity to view sensitive information about your company during a business sale. If not protected by a non-disclosure agreement (NDA), this information could be leaked to the public and/or used against you by competitors. Fortunately, a legally-binding NDA that is drafted by an experienced business broker can ensure your business information remains confidential throughout the sales process.
What is a Non-Disclosure Agreement (NDA)?
A non-disclosure agreement, also called an NDA or a confidentiality agreement, is a legal document that ensures the signed parties do not disclose any private and confidential information that they discover in the sales memorandum (or other documents). This safeguard is essential to ensure news of your company sale does not become public until the sale is finalized.
What is Included in a Non-Disclosure Agreement?
A non-disclosure agreement for a business sale looks different from NDAs for other purposes (i.e. an employee’s NDA). For mergers and acquisitions, the non-disclosure agreement is signed by potential buyers before they are able to view the sales memorandum. The following items are usually included in an NDA:
- The involved parties to the agreement
- The information that is considered confidential (definitions)
- The consequences of breaching the agreement (obligations)
- The time frame of the agreement
- Exclusions (if applicable)
Although a general template may be a good starting point for an NDA, most experienced business brokers personalize each one to ensure the seller is adequately protected before showing the sales memorandum to any potential buyers.
What are The Benefits of an NDA When Selling Your Business?
In simplest terms, potential buyers who sign an NDA are not allowed to make use of your private and confidential information, particularly that which they discover when viewing the sales memorandum.
Further, Ensure The Privacy of The Sale
You do not want news of a potential sale to become public. Unfortunately, in far too many cases where potential buyers have not signed an NDA, the public can catch wind of the news, which may have a negative impact on business operations and the value of your company. An NDA helps ensure that potential buyers keep the sale confidential and do not disclose or use any information that they discover by viewing your sales memorandum.
Reduce The Risk of Competitors Using Your Proprietary Information for Competitive Purposes
Competitors within your industry may have an interest in purchasing your company if you were to make it available. After all, they know your industry better than anyone and subsequently are more likely to see the value your company offers. While this offers an excellent way to expand your search for qualified buyers, it does come with some risk.
Specifically, competitors who do not sign an NDA could use your business plans, current and future products, technological advancements, and client lists against you if they choose not to purchase your company. An NDA serves as a deterrent to ensure this does not occur, and it provides you the opportunity to take legal action against them if they were to violate the terms of the NDA in this manner.
Have The Option to Take Legal Action Against Any Party That Violates The NDA
Ideally, you never have to take action because a potential buyer breached the agreement. In most cases, the NDA is enough to ensure that no leaks occur and that your private information is not disclosed or used against you in any manner. However, in the event, a breach does occur, you can take solace in the fact that you have legal recourse available to you. For business sales, this is usually in the form of monetary compensation, although other forms of consequence may be outlined in the NDA as well.
What Type of Information is Protected by a Non-Disclosure Agreement?
This depends on the business owner. Any information that is not publicly available is usually included in the NDA. In some cases, certain details may be omitted from the sales memorandum and financial documents to further protect the confidentiality of the sale. The common inclusions for NDAs used when selling a business are:
- Business details
- Financial information
- Employee details
- Future (and current) business plans
- New and future products
- Technology innovations
- Customer/client details
- Supplier names
Of course, more broadly, any potential buyers who sign the NDA are not at liberty to publicly disclose that the company owner is considering selling. The agreement is usually created and managed through the business owner’s broker and attorney. If an NDA is broken by a potential buyer, then they can ensure the proper action is taken against the party that breached the agreement.
Does a Non-Disclosure Agreement Have Any Limitations?
Certain limitations may apply. For instance, public records (i.e. SEC filings) are not protected by NDAs. Moreover, the scope of a non-disclosure agreement matters. A broad and non-specific description of what information is (and is not) protected may lead to ambiguity during court proceedings, which can lead courts to interpret the NDA in a manner that you did not intend and is not favorable to you.
However, an NDA that is specific and contains all essential elements is, in almost every case, considered legally binding and can be enforced if one or more of the signed parties breaches the agreement. Keep in mind, the purpose of an NDA is to serve as a deterrent, and breaches are rare when used appropriately during the sales process. It is important to work with a licensed and experienced business broker and/or attorney who specializes in mergers and acquisitions (i.e. M&A attorney) to ensure the legality and effectiveness of your NDA.
Contact Sigma Mergers and Acquisitions for a Free Business Valuation
Are you considering selling your business? If so, then contact the experienced and licensed business brokers at Sigma Mergers and Acquisitions. We have helped more than 600 business owners sell over the past 20 years. Along with appropriately and effectively implementing NDAs, we are able to find and negotiate with qualified buyers who are willing to pay full market value for your company.