Guide to Selling Your Business: Chapter 1 – The Non-Disclosure Agreement
November 1, 2019 by
Even before a letter of intent is executed, a potential buyer (“Buyer”) often requests access to high-level information regarding the assets, customers, and financial history of the seller (“Seller”) in order to validate certain assumptions the Buyer has regarding the Seller’s business and to determine whether the Seller’s business is suitable for an acquisition. Although the nature of these initial requests varies from deal to deal, they typically involve information and documents the Seller considers confidential and proprietary to its business and which provide the Seller with a competitive advantage in its industry (“Confidential Information”).
At a basic level, the NDA is designed to make sure a Buyer safeguards the Seller’s Confidential Information and refrains from disclosing it to any unauthorized third party. The most effective NDAs: (1) specifically define the Confidential Information sought to be protected in the context of the Seller’s business (as opposed to template-driven definitions); (2) specifically tailor the protections afforded such information in the context of the transaction; and (3) require that the Buyer be contractually responsible for protecting the Confidential Information. In addition, every Seller should also consider the following issues in drafting the NDA:
- Survivability of restrictions. In most NDAs, the Buyer obligations to safeguard Confidential Information will survive for a period of years either after the NDA is signed or after it is terminated. This can be an extremely important issue because after the expiration of the survivability period, the Buyer is free from the confidentiality restrictions in the NDA. Since, at this stage, the Seller is understandably reticent to scuttle a potential deal based on how long a Buyer is willing to safeguard its Confidential Information, Seller should: (1) negotiate as long a survivability period as possible; and (2) hold back identifiable Confidential Information (customer names, client names, employee names, intellectual property, trade secrets, etc.) until later in the due diligence process. Seller should only disclose Confidential Information it is comfortable with taking into consideration the survivability period in the NDA.
- Use of Confidential Information. Seller should ensure in the NDA that the Buyer be permitted to use the confidential information solely in evaluating and pursuing the potential acquisition.
- Reproduction and Return of Confidential Information. The NDA should restrict the Buyer’s ability to reproduce Confidential Information and should require that the Buyer either return or destroy Confidential Information if the potential acquisition falls through.
- Non-Circumvention. If the Seller is concerned that a Buyer may seek to use the Confidential Information obtained from Seller to pursue potential business opportunity, Seller should consider adding a non-circumvention provision to prevent the Buyer from engaging in due diligence and then pursuing the opportunity without the Seller.
- Non-Solicitation. Seller may consider adding to the NDA a Non-Solicitation provision restricting Buyer from soliciting Seller’s current customers and employees (especially if Buyer is a competitor) in the event the proposed acquisition falls through. Non-Solicitation provisions require precision drafting for enforceability purposes, so Seller should: (1) only disclose the names or other identifying information regarding customers/employees if such information is properly protected for an acceptable survivability period; and (2) rely on counsel for guidance.
- Ownership of Information. Seller should make sure that it is clear in the NDA that Seller retains ownership of all Confidential Information provided and no ownership interest is being conveyed through the NDA or otherwise (including any license, unless specifically intended).
- No representations or warranties. At this stage, the Seller should disclaim all representations and warranties related to the Confidential Information, including any issues relating to completeness or accuracy. Seller should disclaim all liability relating to Buyer’s use of the Confidential Information or any errors or omissions in the Confidential Information.
- Disclosure to Buyer’s Representatives. Seller should specifically define the third parties (typically professional advisors) to whom Buyer may disclose Confidential Information for the purpose of evaluating the potential acquisition; provided, however, that as noted above, Buyer should be remain responsible for any unauthorized disclosures by any such advisors.
- Injunctive Relief. The NDA should be able to be enforced by injunctive relief in a court convenient to Seller. This will permit Seller to seek immediate relief to stop a Buyer from continued violations of the NDA (assuming the legal thresholds are met).
Although often overlooked in the M&A process, a good NDA at the outset can establish good credibility with the Buyer and help Seller protect against avoidable headaches later. Brown Fox PLLC has decades of experience in representing both buyers and sellers in M&A transactions. Through our deep expertise and attention to detail, we are keenly aware of potential pitfalls in deals and seek the best for our clients. Learn more about us here.
Brown Fox is a business boutique law firm, primarily focused on serving businesses, executives, and entrepreneurs in the practice areas most common to their daily business needs: corporate, labor and employment, intellectual property, and litigation. The firm’s representative clientele includes start-ups; partnerships; small to mid-size, private Texas companies; publicly traded companies; and international corporations. The firm also regularly handles contractual negotiations and disputes for C-level executives and upper management. Additionally, the firm represents numerous cities and governmental entities in governmental and municipal matters.