Most small businesses are privately owned rather than stock corporations. When the owners decide to sell, they have all interested parties sign a Non-Disclosure Agreement (“NDA”) to maintain secrecy of the seller’s business information during negotiations.
One important reason for preventing disclosure of the potential change of ownership is to ensure current and prospective customers of the continuation of the business. Advance disclosure of the the sale could jeopardize current business relationships, reducing the perceived value of the business and the transaction.
Additionally, secrecy helps delay defection by the company’s top employees, especially to the seller’s competitors, as often happens with a change in top management. Losing excellent employees, such as a respected service manager of a car dealership, hurts businesses whose profits depend, in large part, on these people.
The purpose of a NDA is to protect a company’s financial information, trade secrets and intellectual property rights, especially prior to a sale. Proprietary information must be revealed to prospective buyers, to demonstrate the company’s value and other selling strengths, such as lucrative contracts. However, some potential buyers might not purchase after learning the information. Obviously, the owners want to retain the confidentiality of the disclosure. Alternatively, a buyer may want to learn about the seller’s proprietary information, not buy the company, and later use the company’s information for their benefit. The owners have the right to sue for compensation if a prospective buyer reveals any private information to third parties or later use it to benefit themselves.
The main feature of a NDA is the legal obligation of potential buyers to keep all information secret. Businesses could lose market share to competitors if their trade secrets or client list were shared. Potential buyers must promise not to use any confidential information in a detrimental way. The agreement might prohibit making photocopies of the data, or allowing others to have access to it. The NDA should allow the lawyer and accountant of any potential buyer to access the records. Importantly, the seller should make sure that the lawyer and accountant sign and acknowledgment that they have read the NDA and agree to fully comply with it. Prospects agree to return everything to the seller’s broker or owner upon completion of their examination.
Another feature of a NDA is secrecy pertaining to the business being for sale. Business owners often hire a broker who specializes in this field and handles much of the preliminary work. Business owners might choose to meet with prospects off-site, perhaps at the broker’s office. They might provide a tour of the company in the evening, or at a time when the employees are not present.
Most business owners do not want others to know how much money they collected from the sale of their company. The NDA should have a clause to keep this information secret should the potential buyer decide to follow through with purchasing the business. Your NDA should have a clause for post-sale secrecy of all information regarding the sale.
An NDA is simply a good business practice. If any potential buyer hesitates to sign one, the seller should stop all communication with that prospect. On the other hand, if any potential buyer agrees to sign a NDA, be sure it has been drafted by an attorney who has ample experience in this discipline.
After all, the seller must protect what he worked for and earned.
Mark A. Alexander
5080 Spectrum Suite 850
Addison, Texas 75001