Business owners have many factors to consider when they decide to sell their business, but many of them overlook one key step in the process: drafting an appropriate confidentiality agreement to present to prospective buyers.
Most business owners recognize the importance of confidentiality agreements in the ordinary course of business, and often utilize forms that are available on the Internet. However, these generic templates will not suffice in the context of a business sale, thanks to certain concerns that are unique to that manner of transaction, such as the following:
- Customers, Competitors and Employees: In the absence of a properly drafted confidentiality agreement, news of a possible sale will inevitably spread to customers, competitors, and employees, with predictable results.
- Strategic Buyers: Many times the most interested buyer of a company will be a “strategic buyer,” which is often a competitor that wishes to acquire the business to enhance its product offerings or expand its market share. However, strategic buyers already possess information about the company that could be used against it if the acquisition doesn’t take place. That risk can be addressed if the scope of the confidentiality agreement covers all information regarding the seller in the possession of the buyer regardless of when it was obtained.
- Trade Secret Protection: Confidentiality agreements commonly define a company’s trade secrets as one of the items of information that must remain confidential. It is also quite common for confidentiality agreements to last for a fixed period of time. However, confidential information is only subject to protection as a trade secret for so long as it is kept secret. If a confidentiality agreement signed by a potential buyer is for a fixed term (i.e., one year), then after the term expires, if the information is disclosed, it will no longer be subject to trade secret protection. To address that risk, the confidentiality agreement should be of a continuing nature (with no fixed term), with respect to any confidential information for so long as the information qualifies as a trade secret.
There are additional concerns that should be considered in connection with confidentiality agreements in the context of selling a business. It is therefore vital that sellers consult with an attorney to discuss these concerns, and have him or her prepare a customized agreement that will protect their interests before listing the business for sale.