A well-crafted confidentiality agreement can not only be used to protect the seller, it can also help weed out semi-serious candidates and bring about the completion of the sale.
Opening up your business to the scrutiny of potential buyers can be a stressful and potentially risky experience for many owners. After all, to get the best price possible, you are going to have to show prospective purchasers all the intimate details, business processes and trade secrets that have made the business a success. The fact that so many potential purchasers may be current competitors adds to the fear that the information you disclose could be used against you if the sales negotiations break down.
In business sale negotiations it is very common to have the purchaser sign a confidentiality agreement before disclosing sensitive or proprietary information. We believe that a well-crafted confidentiality agreement can not only be used to protect the seller if the deal falls through, it can also be used to weed out semi-serious candidates and help bring about the completion of the sale.
In most transactions, purchasers are asked to sign the confidentiality agreement after the initial discussions have taken place and the Letter of Intent (LoI) is signed. With the right provisions in place, we often encourage sellers to request that the other party sign the agreement earlier in the process so that the two parties can discuss the business openly. Too often, initial purchase agreements have to be revisited or deals fall through after the LoI is signed because new information becomes available to the purchaser after signing the confidentiality agreement.
There are several key components to a good confidentiality agreement that will protect the seller. The first is a clause that specifies the damages the potential purchaser will have to pay for each breach of the agreement. A potential payout of $100,000 per breach is a pretty strong incentive for potential buyers to keep all confidential information safe and their lips sealed. Specifying the damages per breach saves the seller the often difficult challenge of trying to quantify the cost of a breach by the buyer.
Another key component of a strong confidentiality agreement is an injunction clause. This clause allows the seller to seek orders from the Courts for the buyer to immediately stop a specific action. Injunctive relief can be attained quickly from the Courts, especially compared to the far more lengthy process of suing for damages.
We have also advised many clients to request a deposit from potential buyers who want access to a company’s confidential information. This deposit can be non-refundable at any time or forfeited after waivers. Agreements should also include a non-solicitation provision that prevents a prospective buyer from approaching employees or customers.
There are many other considerations that go into a confidentiality agreement and the disclosure of information. These include:
- Who can see the information
- Where the information can be reviewed
- If the information can be copied in any way
- How the information provided to the purchaser should be returned or destroyed if the deal falls through
- What private information is specifically covered by the agreement. This typically includes material not available publicly or already known to the buyer such as trade secrets, propriety information, know-how & processes, business plans, finances, customer lists and marketing strategies
- The length of time the agreements is in place of
With an effective confidentiality agreement in place, business owners looking to sell their business can not only minimize the risks that come from disclosing confidential information, they can use it as a tool to help bring about a successful sale.
If you are contemplating selling your business and would like more information on how to use confidentiality agreements to effectively reduce your risk, please contact us.
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This article is intended to give general information only. We recommend you contact a lawyer for specific legal advice.