It’s important for both business buyers and sellers to understand what a non-disclosure agreement (NDA) is, why it’s important, and how an NDA is used in a business sale transaction. An NDA is one of the key forms in business sale transactions, and it is widely used across the country by business brokers in every single state. So, we wanted to break down the details here, just so everyone is on the same page when it comes to NDAs.
NDA Basics
There are many different kinds of NDAs being used in the business world, and today we want to focus on the NDAs we would use in a typical business sale transaction. First and foremost, not every NDA is the same. NDAs can vary from state to state, and of course brokerage to brokerage. For example, some states have statewide business broker’s associations, and every business broker who is a member uses the exact same NDA for all of their buyers, just so there is consistency between brokerages. However, business brokers can decide to utilize any NDA that they feel adequately protects the confidentiality of the seller’s business and the brokerage.
While each NDA has its differences in language, the content is pretty much consistent across the board. A potential buyer of the business signs the NDA to promise that once received, they will not disclose any confidential or proprietary information concerning the business’s financials and/or operations. Furthermore, buyers agree not to disclose the fact that the business is for sale to anyone else. Many NDAs will also ask the buyer to certify that their intentions for requesting the business’s information are based solely on their intent to purchase the business, and not to use it for some other purpose, like a competitor of the business for example. Normally NDAs used for business sale transactions will also include items that make it clear to the buyer that they are required to go through the brokerage to communicate with the seller of the business, and that they aren’t allowed to communicate directly with the seller without the broker’s permission.
Why an NDA is Important
Confidentiality is the cornerstone of a broker’s commitment to their sellers. Aside from getting the business sold, ensuring the business’s confidentiality is the most important aspect of a business sale transaction. As business brokers, it’s our job to limit the exposure of a business’s confidential information as much as we can. That’s why we have a buyer screening process before any potential buyer receives confidential information about a business. The first step in that screening process is having the potential buyer sign an NDA. After having the NDA signed, then we are able to screen them further using a Buyer Questionnaire or Personal Financial Statement. We need to make sure they are a serious and capable buyer before we allow them to see the business’s confidential information.
If confidentiality is breeched during a business sale transaction, it can have devastating consequences for the seller and even for the buyer. There are 4 main pillars of confidentiality. The first is ensuring that the employees aren’t aware of the sale. If they do get wind of it before it happens, you risk losing them. The seller needs them to continue normal operation of the business and the buyer will almost certainly want to retain them after the sale. Everyone knows how difficult it is to find, hire, train, and keep great employees, so they are a major asset to the business. The second reason to ensure confidentiality is retaining your current and future customers and clients. This one is in the obvious best interest of both buyer and seller as well. If the public or patrons of the business find out that it is for sale, then they could very well start taking their business elsewhere, which would be devastating for the bottom line of the business. The third consideration for confidentiality is that we don’t want competitors finding out about the sale, because they could take advantage of that knowledge. They might try to solicit employees or customers over to them, which would have very negative effects on the business that is for sale. The last component of confidentiality would be ensuring that suppliers or vendors don’t revoke credit if they find out a business is for sale. They might be worried that they won’t get paid and stop the flow of inventory or supplies to the business, which is obviously essential for its continued operation.
The aspects of the NDA mentioned above all work to protect the confidentiality of the seller and their business. By having the buyer agree not to disclose information, the intention is that none of the areas of confidentiality will be breeched. Furthermore, items like the buyer not being able to contact the seller directly ensures that the buyer can’t just call up the business and mention to an employee who answers the phone that they want to talk to the owner because they are aware their business is for sale. There is a good reason that business brokers have all of these procedures in place, and that is ultimately to protect confidentiality.
How an NDA is Used in a Business Sale Transaction
NDAs for business sales are presented to potential buyers when they inquire on a business sale opportunity. The NDA will often be accompanied by a Buyer Questionnaire or Personal Financial Statement that a potential buyer will need to complete as well. The buyer is then screened, based on the information given to the broker, and the broker decides whether or not to send over the business’s confidential details. If the broker needs more information before doing that, then they will reach out to the buyer. If the potential buyer appears to be a competitor, then they should inform the seller, and get the seller’s approval before sending over the confidential information.
A buyer looking at several businesses for sale will be required to fill out a separate NDA for each of the businesses they want to inquire about. This is because the buyer needs to enter into an NDA with each unique business, so that a seller or the broker will have legal recourse, should the buyer breech the contract. Additionally, if the buyer who signs the NDA wants to share the business’s confidential details with anyone else, even a business partner or team of investors, the additional person or people will need to sign an NDA as well, so buyers need to be prepared for that was well.
As business brokers, we take confidentially very seriously, and the NDA is the main instrument we use to ensure that the buyer complies. Getting to see the confidential information of a business is a privilege given to a select group of qualified buyers, so our advice for buyers is to take it seriously when you are sent an NDA and a Buyer Questionnaire/Personal Financial Statement. Incomplete submissions will be rejected, so please take the time to fill it out completely and truthfully, especially the financial portions. The journey from a buyer inquiry to a completed sale is a long one, filled with lots of steps to climb, and the NDA will just be the first of many bridges to cross. Working together with us to get all of the necessary steps completed will make the whole process much smother and successful in the end.