Buying or selling a business: Ensure that your valuable business information is kept confidential

A local business owner put her business on the market.  There were a number of prospective purchasers interested in finding out more about the business and potentially conducting due diligence investigations. The business owner gave each prospective purchaser valuable information about the business as soon as they registered their interest, including financial records and confidential business documents.

One of the prospective purchasers was actually a competitor in the same market who was not genuinely interested in buying the business, but instead wanted to find out more about his competitor’s activities. The business owner discovered that the competitor had used the information to his advantage in a way that was likely to negatively impact on her business (and a likely sale price).  She sought legal advice urgently.

Unfortunately in this case the business owner had not entered into a Non-Disclosure Agreement, also known as a Confidentiality Agreement, with any of the prospective purchasers.

This meant that it was much harder for her to claim anything against the prospective purchaser, as there had been no agreement between the parties as to how information provided by the business owner would be treated.

What is a Non-Disclosure (Confidentiality) Agreement?

A Non-Disclosure Agreement (“NDA”) is an agreement whereby the prospective purchaser agrees not to use information about a business received in the course of negotiations for any purpose other than negotiation of the prospective sale.  Often there will be an agreement that the prospective purchaser will indemnify the vendor for any losses resulting from a breach of the agreement, or reference to other remedies if a party breaches the agreement.

NDAs will generally prohibit prospective purchasers from using the information in a detrimental way, making copies, or giving others access (other than to the purchaser’s professional advisors).

Sign a Non-Disclosure Agreement early on

When a business is being sold, it is strongly recommended that the vendor/seller enters into an NDA with any prospective purchaser early on in the negotiations. 

As the information the vendor provides during the negotiations and due diligence stage of a business sale tends to be highly sensitive information, it is typical for an NDA to be signed before any information is handed out. 

An NDA helps to ensure that important and valuable information about the business is kept confidential and that such information is only used for the purposes of investigations into the purchase of the business.  If a prospective purchaser breaches the NDA, the vendor has recourse against them according to its terms.

If you are buying a business, you should be prepared to sign an NDA before information about the business will be released to you.  You should ensure that you read the NDA document carefully, and it is recommended that you see your lawyer or legal advisor to ensure that the terms you are agreeing to are reasonable and will not hinder your future ventures.

If you are selling a business, you should ensure that you have a carefully drafted NDA that you can provide to prospective purchasers before releasing confidential information about your business.  Your lawyer or legal advisor will be able to prepare an NDA that suits you and your business. 

Why is a Non-Disclosure Agreement worthwhile?

Signing an NDA provides certainty about the behaviour expected of both parties during the period where there has been no legally binding commitment to proceed with the sale.  There are a number of reasons that having an NDA in place can be extremely worthwhile, including:

• It ensures that commercially sensitive and/or confidential information is not released in a way that might harm the business (for example by breaching employee or client privacy, or by exposing trade secrets in a way that could devalue the business).  
• It can also safeguard against customers or clients worrying about the continuation of the business before the details of a new owner and/or the ownership transition have been agreed.
• Some business owners may also wish to keep the amount received from the sale private, so an NDA could contain a clause that prevents a successful purchaser from disclosing the purchase price.
• It protects the intellectual property of your business.
• Importantly, as above, it means that the vendor has recourse against the prospective purchaser for any unauthorised disclosure of information, as an NDA would generally provide an indemnity from the prospective purchaser for any losses that occur from a breach.

If you are buying or selling a business, it is crucial that you take legal advice to ensure you have appropriate protections in place.