Key Takeaways

  • A business sale non-disclosure agreement (NDA) safeguards sensitive information disclosed during the sale process.
  • Buyers are not legally required to sign an NDA, but sellers should insist to protect confidential data.
  • NDAs should define what constitutes confidential information and outline how it may be used or disclosed.
  • Common NDA terms include exclusions, return of materials, duration, permitted disclosures, and jurisdiction.
  • Including or excluding non-compete clauses depends on the seller’s strategy and buyer willingness.
  • Sellers should avoid legal pitfalls by negotiating favorable LOI terms and considering reverse termination fees.
  • Careful attention to representations, warranties, escrow terms, indemnification baskets, and non-reliance clauses is essential for post-sale protection.

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.

Key Clauses to Include in a Business Sale NDA

When drafting a business sale non-disclosure agreement, certain clauses are especially important to ensure both parties understand their rights and responsibilities. Here are essential provisions to include:

  • Definition of Confidential Information: Clearly specify what information is considered confidential, including financial records, trade secrets, pricing, customer lists, and strategic plans.
  • Purpose of Disclosure: State the reason confidential information is being shared—typically for evaluating the business purchase opportunity.
  • Obligation to Protect: The receiving party must agree to use reasonable means to protect the information, often defined as using the same measures they would use for their own sensitive data.
  • Permitted Disclosure: Define who else can receive the information (e.g., attorneys, accountants, or other advisors) and under what circumstances.
  • Return or Destruction of Information: Include a clause requiring the return or destruction of all materials at the end of negotiations or upon request.
  • Duration of Confidentiality Obligation: Specify how long the confidentiality obligation lasts—commonly 1 to 5 years after disclosure, depending on the nature of the information.
  • Governing Law and Jurisdiction: Establish which state’s laws apply and where disputes will be resolved.

These clauses create a strong framework for protecting a seller’s sensitive information while allowing buyers to conduct due diligence.

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.

Red Flags to Watch for in Buyer Behavior

Sellers should be alert to behaviors that may indicate a buyer is not acting in good faith. Some red flags include:

  • Delays in Signing the NDA: Prolonged negotiations over basic NDA terms can suggest the buyer is not serious or is overly aggressive in protecting their own interests.
  • Excessive Requests for Exclusions: A buyer insisting on numerous exclusions from the confidentiality obligation may plan to exploit sensitive data.
  • Reluctance to Discuss Key Terms Early: If a buyer avoids discussing escrow terms, liability limits, or indemnification baskets upfront, they may be preparing to renegotiate unfavorably later.
  • Lack of Financial Commitment: A buyer unwilling to offer a reverse termination fee or reimbursement for the seller’s legal costs may not be fully invested in the deal.

Identifying these warning signs early allows the seller to safeguard their position or walk away from a potentially bad deal.

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.

Frequently Asked Questions

  1. What is the purpose of a business sale non-disclosure agreement?
    A business sale NDA protects sensitive and proprietary information disclosed during negotiations, ensuring it is not shared with third parties or misused by potential buyers.
  2. Is a buyer legally required to sign an NDA?
    No, but most sellers and brokers require it to protect confidential business data before sharing financials, customer lists, or trade secrets.
  3. Can I include a non-compete clause in the NDA?
    You can, but most buyers will resist it. It’s often more effective to address non-compete terms in a separate agreement or the final sale contract.
  4. How long should confidentiality obligations last?
    The term varies but often ranges from one to five years. It should be long enough to protect sensitive information through the sale process and transition period.
  5. What happens if the buyer breaches the NDA?
    If a buyer violates the NDA, the seller may pursue legal remedies such as injunctive relief or monetary damages, depending on the terms of the agreement and applicable law.

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