The Basics of Confidentiality and or Non-Disclosure Agreements for Buyers

You are an individual buyer and you’ve become aware of a business for sale opportunity and the intermediary representing the seller asks you execute a Confidentiality Agreement or Non-Disclosure Agreement (also referred to as an NDA).

  • What is a Confidentiality Agreement or Non Disclosure Agreement?
  • Why do you need to complete this intimidating legal document before you know anything about the business for sale?
  • What is the seller protecting?
  • What are the benefits to the buyer in executing an NDA?

These are all good questions that I regularly get from individual buyers, and I hope to address them from a high level on this blog posting.

What is an NDA or Confidentiality Agreement?

Confidentiality Agreements or Non-Disclosure Agreement (NDAs) are a necessary legal document used in a business sale transaction to protect both the buyer and seller.  In the context of a business sale transaction, it is often necessary to disclose certain information to another party to facilitate the transaction itself.

In other words, a buyer needs to know a lot of information about the business before it can make a reasonable judgment as to whether or not they want to pursue further discussions with the seller or the seller’s representatives.

Likewise, a seller needs to protect a lot of the information a buyer legitimately needs to review in order to make an informed decision.

In order to meet the needs of both parties they complete a Confidentiality Agreement or a Non-Disclosure Agreement to create an open and free flow of information between the parties.

Non-Disclosure vs. Confidentiality Agreement

In practice, these terms are essentially used interchangeably and for the purposes of this discussion, they are essentially the same type of document that serves identical purposes.

When to Execute a Confidentiality Agreement or NDA

Generally speaking, these documents are usually completed very early in the process.  Many times, individual and first-time buyers will ask an intermediary for the location or name of the business before agreeing to execute an agreement.  Depending on the type of business being sold, that information can be highly sensitive and a seller will want to protect that information until they know the buyer is genuine and sincere.

The goal of the intermediary representing the seller is to protect his client’s sensitive and confidential information, while still providing enough information to a potential buyer so the buyer can make a decision to learn or not learn more about the opportunity.

What is the Seller Protecting?

The seller is seeking to protect a lot of information.  For one, the seller typically wants to protect the fact that the business is for sale.  That fact alone, if disclosed openly, could do irreparable harm to the business.  Vendors, employees, strategic alliances, lenders, investors and others could view that information in a way that could do serious harm to the company.

Business methods, client information, financial information, business ideas, new products, intellectual property, etc. are all things that can fall under “confidential information”.  The legal language used in the confidentiality agreement is generally and purposely very broad for a reason.

What are the Benefits of Signing an NDA for a Buyer?

Many individual and first time buyers incorrectly view this document as very one-sided for the benefit of the seller.  While that is generally true, if the prospective buyer ultimately purchases the business they will benefit from those protections.  As I mentioned earlier, the mere fact that a business is for sale may, for example, cause a major customer to reconsider their relationship with the company.  As the buyer, you don’t want to be purchasing a company that has customers fleeing.

Also, by signing the NDA you’re letting the seller know you’re serious about considering the business.  After all, this is still a legally binding document that allows for recourse if breached.  With the NDA in place, you’re free to view highly sensitive and critical decision making information about the company.  Most sellers will not negotiate with a buyer that is unwilling to execute any form of an NDA or confidentiality agreement.

Final Tips 

  • As a buyer, don’t be turned off by a request to sign an NDA or Confidentiality Agreement.  This is a normal and standard practice used at all levels of business transactions.
  • Be aware of who you can share the confidential information with that you receive from the seller.  Generally, but not always, you’re allowed to share the information with your professionals (e.g. accountants, attorney, financial advisors).
  • This is a legally binding document.  Make sure to read it carefully and adhere to the language in the agreement.

If you want to learn more about Confidentiality Agreements and NDAs, please contact Frank J Orlando of Oak Hill Business Partners.

Frank Orlando is a Partner with Oak Hill Business Partners and a veteran business broker and M&A professional.  He leads the Business Sales and M&A Advisory Services practice for Oak Hill.  Not only does Frank have deep experience as a trusted advisor to business deals, he has also been a buyer and seller of businesses as well.

Oak Hill Business Partners is a Milwaukee, WI based firm focused on the growth of small and mid-sized firms needing expertise in finance, sales, marketing, operations, or mergers and acquisitions.  Oak Hill serves the Upper Midwest with partners based in Milwaukee and Indianapolis.   In 2012 and again in 2013, Oak Hill was named to the Milwaukee Business Journal’s List of Top 25 Management Consulting Firms Serving Milwaukee.

Posted by Erik Owen