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Confidentiality Agreement: A Business Seller’s First Line of Defense

22 Feb Confidentiality Agreement: A Business Seller’s First Line of Defense

Selling a privately-owned company often involves privileged information, including details on everything from the electric bill to how much a particular customer contributes to top-line revenue. When it comes to doing deals, sensitive information is often thrown around willy-nilly. The potential for highly-sensitive information to be leaked to competitor’s, customers or both can not only put a wrench in the cogs of the deal but can ultimately lead to the demise of the company’s profits. Some customers may get wind of a change and decide to change providers to avoid the hassles inherent in management transition.

CAs and NDAs: Protection from Leaks

Confidentiality and Non-Disclosure Agreements can help prevent the leakage of pertinent and strategic information. Legal documents can often provide a false sense of security. They’re really only as helpful as the integrity of the executor. However, they are helpful as breaking them can at least provide the seller with some punitive recourse in the event the document is breached. Conversations for company transitions could involve the protection of one or more of the following:

  • Financial Information. Financial statements contain most of the story behind a company’s past success and will most likely point out where the chinks in the armor lie. 
  • Confidential Marketing Memorandum. This document contains even more information than financial statements. It will have information on product/service volumes, key markets, demographics of customers, company strategy, analysis of the value of company assets and information on intellectual property. In essence, the CMM tells the story of the entire business, including strategic business information about the company.
  • Letter of Intent. Confidentiality must be mutual. If the buyer knew the seller was being flippant about a signed LOI, then the deal could implode.
  • Key Customer Data. If key customers make up a large portion of annual revenue, then losing said customer could be devastating on the profitability of the company. Damaging such relationships can be easily done when information is leaked on the potential execution of a deal. Keeping customers and customer information confidential is absolutely necessary.
  • Management. Management could receive incentives to stay-on for a time after the deal closes. Each member of the management team will most likely have a different conversation with the buyer.
  • Phone/Email Correspondence. Any phone and email conversations between parties must involve the understanding that each time a conversation takes place, it is done in the strictest of confidence. This also includes face-to-face conversations as well. All conversation content is subject to the guiding rules of the CA or NDA.

If there is a breach, the CA or NDA will usually contain provisions on how the company will be affected along with the punitive damages the potential business buyer will suffer as a result of the breached agreement. State laws for M&A are generally included as they differ in punitive damages and the action that can be taken if a breach of contract is made.

In the even that a deal is cancelled, most CAs and NDAs will require that any and all documents which have been part of the transaction must either be returned without being copied or must be destroyed by the intended buyer.

Most agreements expire in a year or two after their execution and confidentiality is exempt when the facts are in the public domain or if a court document requires subpoena of the information. In the event of a subpoena, the affected party (in most cases the seller) is entitled to notice that such information will be released.

While a CA or NDA is no guarantee that confidential information will not be released, it can be a good first line of defense in the event that a feigned potential buyer intends on being nefarious.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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