When you decide to sell your business, you’ll need to provide enough information for a potential buyer to make a decision. Some of this will be sensitive information about your sales, profit, customers, business processes and know-how. Potential buyers will want to see this information but as the business owner, you may want to limit what buyers can see, and prevent that information from going any further.
- Having a potential buyer sign a confidentiality agreement (or ‘Non-Disclosure Agreement’ NDA) gives you some protection.
- If they do breach confidentiality you have a better chance of taking legal action and seeking damages with a signed document from them promising not to breach confidentiality.
- Although keeping elements of your business secret is absolutely essential, you do need to balance it with the buyer wanting to complete robust due diligence and find out what makes your business tick.
- One way to limit who gets your information is to disclose only parts to general queries, and then only full disclosure to a person you’ve qualified as serious.
When you're selling your business, you’ll probably use your lawyer to draft this confidentiality agreement for interested parties that suits your business. In some cases, you may also get your employees to sign as well, especially if they are involved in the sale process. Get legal advice to make sure all the boxes are checked and that the agreement contains everything it should.
Benefits of a confidentiality agreement
There are several good reasons, including:
- Keeping news of the potential change of ownership from being released to customers or suppliers. You want the business to continue as usual.
- Selling a business can be unsettling for employees, some who may wonder about the security of their jobs and others may consider it an opportune time to leave. You’ll want to retain any key employees in positions of trust who you can choose to involve in the selling process.
- It helps protect the financial and intellectual property rights of the business. If a potential buyer decides against the purchase, the agreements reduce the likelihood they will reveal any information they learned while conducting their due diligence.
- Potential buyers will feel more secure knowing that the information is protected, so when ownership changes hands, any sensitive information that is now owned by them isn’t public knowledge.
- Potential buyers who are serious will expect to sign an NDA as a measure of your professionalism.
- A potential buyer who refuses to sign an NDA is either not really interested in buying the business, or they are inexperienced in how the process works, or are being nosey/spying on the operation. It’s a useful test.
Prequalify potential buyers
Before placing the NDA in front of a potential buyer, you can save yourself a lot of time by making sure they're a genuinely interested party with the means to purchase. An effective way to prequalify prospects is to describe your business and response requirements in a way that helps unqualified buyers opt themselves out. Ask potential buyers to provide the following information:
- What they're looking for in a business purchase
- Their purchase timeline
- Their related business experience
- If they have the means to buy your business
You can cover this request in one sentence such as:
Please outline your related business background, the type and size business you seek, your investment capability and your interest in this business.
It’s almost a job interview. People that are genuine will not have an issue providing you with this information. In the end you’re trying to find a person that not only will be able to afford your business, but one that fits with the culture of your business.
User a business broker
If you do not want to talk to prospective buyers immediately or don’t have the time to prequalify buyers, then consider using a business broker. They can do much of this work for you including only presenting genuine offers. The trade-off of course is their broker free once the business is sold.
Creating the NDA
Most agreements are pretty standard. The potential buyers agree:
- That any information provided about the business is confidential
- Not to divulge that information to anyone else, including the fact that the business is for sale
- To return all business records and data to the business owner after it has been reviewed
- Not to make copies of that information
- Not to contact the business's employees, customers or suppliers
- That it's their responsibility to make an independent verification of the information provided
- To allow the business owner to obtain financial and credit information about them, so they can verify they're capable of purchasing the business
Your solicitor can draft an agreement that lays out these terms in more formal, legal language. However, if you're not using a lawyer, you can download free NDA templates that include all the necessary information. The following sites have free NDA templates that can be quickly and easily customized for your business.
If you do create your own NDA document, then we still recommend you get it checked by your legal advisers to ensure it is specific to your business situation.