A non-disclosure agreement (NDA) is an important document customarily part of every business sale transaction. It is typically the first agreement to be entered during a transaction. In a nutshell, an NDA is a legal contract between the seller and a potential buyer used to protect the confidentiality and limit the use of information exchanged. Even if this seems straightforward, there are a number of aspects that need to be considered by both parties involved.
Considerations for the Seller:
The NDA is an essential part of the process for a business owner selling their business. For the seller especially, it is important to protect the company’s interests. For the seller, it is critical that the NDA identify (a) what information is considered confidential information and (b) what the potential buyers are allowed to do with that information. Throughout the transaction process, prospective buyers will receive a significant amount of confidential information including financial information, contracts, customer lists, and more. The NDA is in place so that this private information will not be used for purposes other than a potential transaction and will not be disclosed to outside parties.
NDAs also outline how potential buyers will be required to return confidential information upon request by the seller. This ensures that the seller’s information is protected from being misused afterwards. Finally, the NDA should include the consequences for violating the agreement. This is used to discourage misuse of the private material by the potential buyer and have a process in place to take legal action if needed.
Considerations for the Buyer:
Although buyers are typically excited to explore a potential deal, they should carefully review the proposed non-disclosure agreement. Buyers will also be interested in determining what is defined as confidential information versus information that is publicly available. Buyers should confirm that the NDA contains language clarifying the confidentiality of the discussions between parties regarding the transaction, including the identity of the parties and the terms of any bid.
Considerations for Both Parties:
Both the buyer and seller may wish to collectively confirm some points. Firstly, they want to make sure that the exchange of information doesn’t require continued negotiations or an offer. In this case, the confidential information may be used by the potential buyer to decide against pursuing the purchase of the business. Another consideration is to note that the agreement will not be changed unless both parties mutually agree. This will help avoid surprises that could arise should one party decide it would like the agreement altered.
The NDA is a very important document for both buyers and sellers to understand. It is used to outline what is to be shared about the company and how that information may be used. It is critical to protect the seller’s information from being disclosed to outside parties. This document marks the beginning of every acquisition and should be paid close attention to in order to protect the interests of all parties involved.
How we Handle NDAs:
Clients of Small Business Deal Advisors can rest-assured that no buyer will receive specific information about their business until a non-disclosure agreement has been signed. Buyers appreciate the convenient viewing and signing of the NDA through our online platform.