Non-Disclosure Agreements and Buying or Selling a Business
Before reading this article, take a look at our full writeup on Non-Disclosure Agreements for a complete understanding of what an NDA is. As we mention there, NDAs are especially useful (and necessary, in our humble opinion) if you are buying or selling a business, and we thought this called for a more in-depth explanation.
Quick refresher: What information does an NDA protect?
An NDA can cover any information that a small business owner wants to keep confidential, including client lists, employee information, intellectual property, trade secrets, pricing structures, and marketing methods.
Using an NDA during business purchases or sales
NDAs provide an essential level of security when buying or selling a business. The parties exchange sensitive information, and a comprehensive NDA ensures that this information won’t be turned to nefarious use.
For sellers of a business: If you are selling your business, you need to provide the potential buyer with access to all pertinent business information (such as employee information, company financials, marketing efforts, intellectual property, etc.). However, you don’t want the buyer to be able to leverage that information against you, should the transaction falter.
Generally, you will want to expand the scope of what is considered confidential in the NDA (“Confidential Information”) to include as much information as possible; the broader the definition, the more material is protected. NDAs should cover most (if not all) business information inaccessible to the general public. Also, make sure the potential buyer signs the NDA before negotiations begin – you want to make sure they don’t have access to any sensitive information from the beginning.
For buyers of a business: If you are buying a business, the seller will likely request that you sign an NDA at the start of the process. These NDAs are often mutual – that is, both parties agree to keep each other’s information confidential. This benefits both the buyer and the seller, and ensures that neither one can disclose the other party’s information.
Keep an eye out for “non-solicit” provisions. Such a clause would prohibit you, who will have access to valuable client and employee lists of the seller, from soliciting those clients and/or employees for your own company, and usually lasts around two years. This is standard language included in many NDAs for business sales, but you should still be aware of the limitations and responsibilities it puts on your business.
Important provisions for a business sale NDA
The definition of “Confidential Information” is the most important feature of an NDA. Buyers must be especially conscious of what information is covered by the agreement, since you have the responsibility of maintaining confidentiality.
Non-Compete and Non-Solicit clauses. These clauses are most common in NDAs attached to a merger or acquisition. As the potential buyer, you may be restricted from competing with the seller should the sale not go through. Pay attention to the scope of this clause – how long it will be in effect, and any geographical restraints. You need to know the obligations placed on you by this provision.
If you are on the seller’s side, you want the restrictions to be as broad as possible. This means the potential buyer will be prohibited from doing business with any of your competitors, current or potential, as well as from soliciting your current clients or employees. Courts generally disapprove of non-competes, so they must be worded carefully to withstand judicial scrutiny. Speak with an attorney about how to craft the language necessary for this important provision in your NDA.
Do you think you need an NDA for your business? Is a business sale in your future? If so, crafting a strong NDA is essential. Contact us today to keep your information secure.