Non-Disclosure Agreements Vital To Ensuring A Smooth Transaction

By Generational Equity

04/25/2014

Recently Axial, a leading network of business-to-business capital creation professionals, wrote a fantastic white paper on non-disclosure agreements (NDAs), a.k.a. confidentiality agreements or CAs. As we have discussed before, having an ironclad confidentiality agreement is critical if you are going to market your company without professional representation because as you approach buyers, especially competitors, it is critical that you protect yourself from severe financial loss. Before you release any proprietary information about your company, it is vital that you get a signed NDA in hand.

According to Axial’s research, there are several components to a solid NDA:

• Definition of Confidential Information
• Term of Confidentiality
• Disclosure / Representatives
• Use of Confidential Information
• Compelled Disclosure / Legal Obligation to Disclose
• Return / Destruction of Confidential Information
• Remedies
• Interaction with Employees
• No Binding Agreement for Transaction

Keep in mind that there are two types of NDAs: one-way and two-way. A one-way NDA is usually the type used in negotiations with financial buyers such as private equity groups. As the name implies, one party – the seller – is disclosing proprietary information and the receiving agent at the equity firm signs a NDA. By far, the most used type of non-disclosure agreement is the two-way, which means that both parties sign the NDA and agree to keep confidential any and all information exchanged. This is especially helpful in negotiations with strategic buyers.

If you are approaching the market without professional representation by an M&A advisory firm, be sure to have your confidentiality agreement created by an experienced attorney. This cannot be stressed too heavily. M&A firms have standard NDAs that have been crafted after years of experience and are carefully designed to protect their clients. You need to spend the money and hire an attorney to do the same for you if you are going to be looking for buyers on your own.

And once created, do not deviate from the non-disclosure agreement. Buyers regularly will try to change some of the terms to their advantage. Do not allow this to happen. If you do, you can be sure that your ongoing negotiations with that buyer will be long and tedious, as every document you send from then on will be abridged.

The Scope of the Document – Key First Step

Time and space do not allow me to delve into detail on the nine key features of a CA outlined above. Perhaps the most important item though is the first one, the definition of what constitutes confidential information. From a seller’s perspective this is vital. You will want to be as broad as possible with this item in order to protect yourself and your business from loss. Naturally, your buyers will want to limit what is defined as confidential, and this is where the first conflict usually arises.

The 1991 case of Pharand Ski Corp. v. Alberta has helped establish a precedent of considerations for confidentiality, according to Axial:

• The extent to which the information is known outside the owner’s business
• The extent to which it is known by employees and others involved in the owner’s business
• The extent of measures taken by him to guard the secrecy of the information
• The value of the information to him and his competitors
• The amount of money or effort expended by him in developing the information
• The ease or difficulty with which the information could be properly acquired or duplicated by others

As you can tell from this list, what is and what is not confidential can be quite difficult to ascertain and agree upon. Again, this points out why it is vital to work with a mergers and acquisitions firm that has crafted hundreds of these NDAs. Their experience can lend itself to your transaction, and instead of learning on the fly how to create and craft a confidentiality agreement, you can benefit from the experience of hundreds of closed transactions. This is one of the real strengths Generational Equity brings to the table. Not only have our dealmakers crafted thousands of NDAs but they have also seen every trick in the book used by crafty lookey-loos to gain access to valuable information with the goal of harming your business.

And that is the real goal of any NDA: protecting your most valuable asset from financial harm. The history books of M&A are littered with horror stories of business owners who have literally lost everything by exposing themselves to less-than-honorable operators who have no intention of ever buying the business and are only looking to obtain trade secrets and other proprietary pieces of information. Note: Industry trade shows are notorious for this! After a few drinks at the cocktail reception, beware the competitor who sidles up to you and wants to discuss a merger of equals. Before long you might find out how vital an NDA is in that scenario!

Ultimately the confidentiality agreement is only one of several documents you will need to create (others include the business profile and offering memorandum). Again, before you disclose ANYTHING to ANY buyer, get a signed NDA in hand. To learn more about the confidentiality agreement and the other documents you will need to create, I suggest attending a complimentary, no-obligation M&A seminar conducted by Generational Equity. We hold these throughout the U.S. and Canada because we firmly believe that most business owners are like sheep heading to the wolves when it comes to the entire M&A process. You only get one chance to get it right with your most valuable asset, so attending a daylong seminar on how to do so is vital. 

Special thanks to Axial for clearly outlining the critical components of what needs to be included in a NDA. Again, if you are going to try to find buyers without professional M&A help, at a minimum please contact your attorney and get him or her to create an ironclad confidentiality agreement to protect your financial legacy.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC All Rights Reserved