How to Prepare a Business Sale Confidentiality Agreement

Sep 20, 2022

Deciding to sell a successful business you’ve spent years building is a significant milestone: you’re ready to let go of the day-to-day operations and enjoy the fruits of your labor. 

But before selling your business, you must protect your proprietary information by ensuring it stays confidential and limiting who gains access to that information. Having competitors, vendors, and employees discover a potential sale too early or gain access to information they shouldn’t have could disrupt your deal. 

That’s where a Non-Disclosure Agreement (NDA) for the sale of a business comes in to protect your interests through the entire process. An NDA allows you to provide information to potential buyers without fear that they will share information about the sale or your business operations to other individuals or companies.

What Is a Business Sale Confidentiality Agreement (NDA)?

Potentially as important as a business purchase agreement, a confidentiality agreement is a key document when selling a business. It ensures the security of any private details related to the sale or operations of your business and protects your personal information.

Business brokers and potential buyers need access to confidential business information when evaluating a business. An NDA allows these parties to have access to the necessary confidential information but limits what they may do with that information. Interested buyers can’t share details, proprietary data, or even that the business is for sale with the public or internal stakeholders like employees, vendors, and competitors. The broker will use this information to assist with the sale process and accurately represent your company during negotiations with potential buyers.

Confidentiality for All Parties

Buyer-seller confidentiality agreement clauses should protect both parties when preparing an NDA for a business sale. To make an informed decision, the seller should properly vet the potential buyer before closing the deal. They might consider whether or not the buyer is a good fit and has the financial ability to buy the business. 

Further, the buyer is responsible for independently verifying the claims and information provided by the seller and needs to conduct due diligence on the business to determine its value.

How to Prepare a Business Sale Confidentiality Agreement

Confidentiality agreements are usually pretty standard but can be made more specific, depending on how much access to sensitive material each party needs.

What Does a Non-Disclosure Agreement Cover?

An NDA is a legal agreement or contract for keeping confidential information private. It’s important because the buyer needs to know specific details about your business before they can decide if they want to buy it or not and for what price. Items such as how your company makes money, how much profit it makes, and its customer information can all greatly influence the sale price of your business.

A business sale confidentiality agreement covers all information you want to keep secret during negotiations and aims to keep the seller’s confidential information private during due diligence and potentially after the sale as well. The agreement will define exactly what is and isn’t confidential information and how long information must remain confidential, but typically, the agreement will include:

  • The name and location of the business
  • Financial statements and KPIs
  • Information about intellectual property
  • Salaries
  • Marketing strategy
  • Revenue streams
  • Customer lists
  • Ownership information
  • Other information that could harm your business if it were public knowledge

Common Clauses of Standard Agreements

There are some elements to consider when drafting a confidentiality agreement for the sale of a business, including:

  • Restrictions that involved parties can’t further divulge any information shared during the transaction without express permission, including that the business is for sale. Applicable not only to financial information but also to anything else that could give an advantage to other potential buyers or employees, customers, suppliers, and third parties. 
  • All records must be destroyed or returned without making any copies. This clause helps prevent compromise of proprietary information and trade secrets, information theft, or accidental disclosure to clients or suppliers. Records or documents typically may not leave the premises reserved for the due diligence phase if conducted in person. 
  • Contact with employees, customers, and suppliers is also not permitted unless all parties agree in writing.

Which Information Is Confidential?

Involving a lawyer can be critical when determining which information to cover with a buyer-seller confidentiality agreement. Often included are:

  • Financial figures – profit & loss statements, cash flow, and balance sheets
  • Trade secrets
  • Revenue streams
  • Business strategies and long-term plans
  • Employee lists with contact information

You should also determine how long the NDA is in effect. Typically, regardless of the outcome of the potential sale, neither side can legally discuss any of the information covered by the NDA for a year or more. Your lawyer should also help you determine who will have access to information, from buyers, advisers, and business brokers to lawyers and consultants.

Key NDA Questions

There might be a lot involved in a confidentiality agreement. Here are some key questions you might ask before signing an NDA:

What does a non-disclosure agreement look like?

A non-disclosure agreement is a fairly standard legal contract that says you won’t share information about the other party’s business with anyone else, including your employees. 

Does a Buyer Have to Sign a Confidentiality Agreement?

It may not be required, but serious buyers do. The seller will likely not provide a potential buyer with much information without a signed agreement. Those who won’t sign NDAs will struggle to be considered a genuine buyer and will likely be avoided by the seller. Without signing, there’s no incentive to keep the information confidential, and a seller would be unlikely to provide access to essential business details. 

What Can Happen If You Don’t Use an NDA?

Suppose you don’t have a signed NDA, and a competitor with no intention of purchasing your business gains access to your confidential information. They could use this information to strengthen their own business by targeting your specific customers, undercutting your price, hiring your employees, copying your products, or even attempting to disrupt your future growth plans. Without an NDA in place, you have no legal protections. With a signed confidentiality agreement, you would have significant legal standing and be able to pursue damages against the competitor for violating the terms of the agreement.

How Can I Get Someone to Sign a Confidentiality Agreement?

The easiest way to get someone to sign an NDA is to require a signature before disclosing confidential information. Even if there is an expectation of confidentiality already in place due to the nature of your prior business dealings, having a counterparty sign before receiving the additional confidential information may be beneficial. This will help protect you against later claims that they didn’t know the information was confidential.

Does an NDA Cover Negotiations?

Confidentiality agreements are a standard part of any negotiation, especially when dealing with proprietary or confidential information. They allow you to discuss sensitive information without worrying about what will happen with it once negotiations have finished (or failed). 

Once all parties agree on terms and conditions, they must sign the business purchase confidentiality agreement. That way, the terms of the agreement are legally binding and both parties have acknowledged what is and is not confidential information.

3 Common Mistakes When Selling a Business

Selling a business can be a complex process, and mistakes can happen. Most of those errors result from a lack of forethought and planning. 

  1. Forgetting to Plan an Exit Strategy

Many successful entrepreneurs are great at running their business but overlook their exit strategy. They get busy running their company and don’t realize that the right time to sell may come quickly. Knowing what you want from your business and keeping your eye on the ball when finding a buyer is essential.

  1. Not Knowing the Business’s Market Value

Your company’s value is one of the most impactful considerations when selling your business; not getting an accurate valuation is another common mistake. Pricing your business too low might cause you to miss out on opportunities. But if you price it too high, you might scare away qualified buyers. 

Find someone who understands your industry well enough to make an informed decision about how much your company could bring in during a sale. They’ll then use this figure as a starting point for negotiations with prospective buyers.

  1. Skipping a Business Sale Confidentiality Agreement

You must protect yourself and your company when you plan to sell your business. An NDA for business sale can ensure that all your confidential information stays safe and that both parties’ interests are protected.
It’s wise to have a standard business purchase confidentiality agreement before you begin shopping around for potential buyers or investors to protect sensitive information you might share during negotiations.

  1. About the Author:

  2. About the Author:

    Heather Hubbard is a managing partner of Valesco Industries. She is responsible for managing the firm, strategy development, portfolio management, new investment origination, and team development.

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