Business Sale Non Disclosure Agreement: Everything You Need to Know
A business sale non-disclosure agreement is a legal contract formed by the seller and a possible buyer of a business that describes confidential information. 8 min read updated on January 01, 2024
Updated November 6, 2020:
What Is a Business Sale Non-Disclosure Agreement (NDA)?
A business sale non-disclosure agreement (NDA) is a legal contract or agreement formed by the seller and a possible buyer of a business that describes the confidential information a seller wants to disclose to that buyer with restrictions to third parties. NDA is also known as Confidentiality Agreement (CA). When parties form an NDA, they build a confidential relationship, and any type of confidential and proprietary information or trade secrets listed in the NDA will be protected. If your business is for sale, an NDA will protect it as it also protects non-public business information.
Do I Have to Have a Buyer Sign an NDA?
A buyer doesn't have to sign an NDA, but if you are disclosing important proprietary or confidential material, it is advisable to have an NDA signed. An NDA is required by most business brokers before they release the information to a potential buyer; however, it is your decision if you will require a buyer to sign an NDA if you are selling your own business.
How Can I Get a Potential Buyer to Sign my NDA?
You can have your buyer sign the NDA by sending it via email, then they can send it to you through fax. However, some people don't have a fax machine and printer, so you might lose some buyers using this process. You can disclose some information about the business over the phone, then you can request to meet up with the buyer. If you meet the buyer in person, you can ask them to sign the NDA. Make sure you do not tell the buyer anything that is really important regarding your business before they sign the NDA. Signing an NDA electronically is probably the fastest, easiest, and most secure method.
What Does the NDA Cover?
Any language can be included in an NDA. Any type of information not generally known can be protected by an NDA. An NDA can also include clauses that will protect the person acquiring the information, making them not liable to keep the information confidential, if they lawfully acquire the information using other sources. Typically, an NDA will only require the party who receives the information, usually the buyer, to keep that information confidential when it has been directly provided by the other party or the seller. Sometimes it is less difficult to get a receiving party to sign an NDA that is simple and shorter and excludes the safety provisions that protect them.
Any non-disclosure agreement should cover the following, at a minimum
The parties involved in the agreement should be included in an NDA. An NDA should define what is confidential, such as the information to be kept secret. Unpublished patent applications, financial information, trade secrets, business strategies, customer and vendor lists, etc., are generally listed as confidential in a modern NDA. Information is not considered confidential if it was not disclosed throughout the disclosure period (for example, one year after the date of the NDA). If the receiver already knows the information, the provision which restricts the disclosure or use of the confidential data in an NDA will be invalid.
An NDA should include information that is generally available to the public. If the materials are subject to a subpoena or a court order, this would override the NDA. Though most practitioners pay attention to that matter, not as an exclusion from confidentiality (as a result of court-ordered secrecy provisions might apply even in a case of a subpoena) but as a class of allowable disclosure. The duration of the confidentiality and the term for which the contract is binding should be covered in any non-disclosure agreement. An NDA should also cover the obligations of the receiver in regard to the confidential material, typically to use the information only for dedicated purposes and to show it only to parties who need to know the information for those purposes.
Using appropriate efforts that are not less than reasonable efforts, keeping the information confidential is the responsibility of the receiver. A reasonable effort is usually defined as the same effort the receiver uses to guard its own confidential information and to make sure that anyone who gets the information will follow the restrictions in the agreement.
Do Most NDAs Include a Non-Compete Clause?
Usually, the non-compete clause is not included in an NDA because most buyers will decline to sign it. If an NDA has a non-compete clause, the buyer will be limited in competing for your business or a similar one if they don't want to buy it.
Legal Mistakes When Selling a Business
From the seller's point of view, negotiating and executing a non-disclosure agreement with a potential buyer is the first step in selling a business. NDAs that are well-drafted will prevent the prospective buyer when soliciting and hiring the seller's employees. Discussing the NDA can be vital, as it enables the person selling to decide if he can proceed with the deal with his/her potential buyer. There will be a lot of legal documents that must be signed, but arranging an NDA will be the first, followed by a letter of intent (LOI) and the acquisition agreement. With a lot of changes by the buyer's lawyer, it can take 14 days to negotiate a simple NDA. Obviously, this is a bad sign and an indication that it won't go well; however, if the potential buyer signs the NDA in just a few days with few revisions, this will give confidence and a positive vibe to the seller to continue with the deal.
Failure to negotiate the LOI's important terms of the deal is the most typical and critical mistake by the seller. The seller should establish a competitive and aggressive environment, and the potential buyers should compete with each other before the seller executes the LOI. When the LOI is completed, all leverage of the seller will be gone, and selling his or her company to potential buyers is not possible. There is a no-shop provision that prevents the seller from selling the company for a period of 60 to 90 days. A prospective buyer, for instance, will offer a purchase price that’s higher; however, the seller should expect that an ample part of the price at the time of purchase will be moved into escrow and will need a limit on the liability equivalent to the buying price. Another buyer might offer a lower buying price, but an escrow will not be required, and all parties will agree to a 10 percent limit on liability. Before selecting a buyer, the person selling should examine and negotiate every important term of the offer, and those terms should be reflected through the LOI.
Sometimes in order to establish, in effect, an option to purchase, private equity firms and large companies might execute an LOI with the seller. Large companies and private equity firms will lock the seller up with a no-shop provision, which means they can see the seller's confidential materials and books for free. These companies will then exploit the price by lowering it or just leaving it with the seller's valuable information. This is not a good situation for the seller, as he or she will have hardly any options other than filing a case against that buyer for not negotiating in good faith, and that is costly and hard to prove. The seller should require the buyer to pay a reverse termination fee for protection in case the negotiation or acquisition agreement is canceled and the seller is not at fault. A reverse termination fee is common in deals that are public and private transactions if the buyer cannot get financing, and it might go high as 10 percent of the price at purchase.
If the deal is canceled and the buyer leaves, the seller should try to get a reimbursement of his/her lawyer fees, including other expenses from the transaction. To protect the seller after the sale, it is crucial that those important provisions be included in the acquisition agreement. An example of a provision in which the LOI should be discussed is the limit on liability. If, for example, something goes wrong after the sale because the seller has violated the agreement in the acquisition contract if there is a cap on liability, the buyer will only be able to get a certain amount back. A limit of 10 percent to 20 percent of the buying price should be the target of the seller, and any buyer carve-outs should be minimized.
If a portion of the buying price is moved to escrow to ensure any after-closing indemnification claims by the purchaser, an attempt by the seller to specify the escrow is recommended. In the case of immaterial breaches of the representations and warranties by the seller, the buyer must not be allowed to introduce several trivial fees and put a financial strain on the seller.
In the acquisition agreement's indemnification section, it is recommended that the seller include a basket which is around 1 percent to 2 percent of the buying cost. The buyer will only be allowed to retrieve its total number of damages in excess of the amount of the basket. Including a smaller basket for personal claims should be attempted by the seller. For example, if the buyer's damages don't go over $20,000 with regard to a specific claim, it won't be calculated toward the basket.
A non-reliance provision is another protection for the seller that requires the buyer, in effect, to recognize that it is purchasing the business completely based on the acquisition agreement's representation and warranties of the seller. The non-reliance provision is intended to restrict the buyer from filing a case against the seller based on any projections, writings, oral statements, etc., outside the agreement.
Non-Disclosure Agreement for Business Negotiations
The Confidential Information section includes what information is not to be disclosed. The nondisclosure section defines the disclosing and receiving party and the intended use of the shared and confidential information. This section should also specify to who the receiver may disclose the confidential information during negotiation. The return of the materials section contains the need for confidential information to be returned by the receiver. The exclusions section specifies some exclusions in the obligations of the receiving party, as there are situations in which it would be unfair or too hard for the receiving party to keep the information confidential.
The terms section defines the contract's timeframe; however, there's no standard time limit for the contracts, as each circumstance is unique. The no rights granted clause states that the disclosing party does not make any commitment to grant any right, title, or interest in confidential information to the receiving party. The warranty section specifies that the disclosing party has the right to make the disclosures under the agreement. In the event of a conflict between businesses, the general provision would cover this, such as what court has jurisdiction over any resulting legal action, the acceptable remedies, responsibility for legal fees, etc.
If you're selling your business, you might need the help of a corporate lawyer to protect you. In the case of a dispute and litigation, an acquisition agreement that is well-drafted will be a good insurance policy.
If you need help with your business sale non-disclosure agreement, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.