AVOIDING PREMATURE DISCLOSURE OF A PENDING SALE
When selling a business, one thing most sellers don’t want is premature disclosure of the pending sale. Customers may drift away to competing businesses, key employees may look for other jobs because they think the new owner will clean house, and suppliers may tighten up credit terms to avoid getting stuck with unpaid bills.
Any one of those issues can reduce profitability for a business – and since many valuation formulas are based on multiples of net income, even a relatively small dip in revenue can have significant impact on the ultimate sale price. Having all of these issues occur at once can be fatal.
NONDISCLOSURE AGREEMENT (NDA)
For these reasons, most savvy sellers will require prospective buyers to sign a Nondisclosure Agreement (NDA). An NDA, also known as a Confidentiality Agreement, is a contract between the prospective buyer and the seller that prevents disclosure of information about a pending sale or the business itself.
Buyers naturally need to engage in due diligence and get information about the business to help them decide whether to buy it, and if so, for what price. Typically that means reviewing tax returns, financial statements, leases and other confidential information about the business such as marketing and sales strategies, the identity of key customers and suppliers and other sensitive business information.
SIGNING THE NDA
In order to access this information, buyers must sign an NDA. The NDA requires that the buyer treat the information received as confidential. Usually the buyer is allowed to share the information with its attorney, accountant and other professionals involved in the transaction but not with anyone else. In many cases, the NDA requires the return of confidential information documents within a very short period of time if the buyer chooses not to go forward with the sale.
Using an NDA not only can help sellers preserve confidentiality about a possible sale, but it also is a wise precaution to prevent trade secrets and other potentially useful information from falling into a competitor’s hands.