Shhhh! Why You Need Nondisclosure Agreements

Shhhh! Why You Need Nondisclosure Agreements

by | Sep 5, 2013 | Advice

shh

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.

DUE DILIGENCE
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.

Seller Beware: Dirty Tricks to Avoid

Seller Beware: Dirty Tricks to Avoid

by | May 30, 2013 | Advice

money mousetrap

My friend Ted Sarvata, a business consultant with Gazelles, Inc. shared an interesting article with me recently about the strategies used by savvy buyers to drive down the price on a business sale.

One tactic to watch for is an initial offer for way more money than the owner dreamed of, often based on a formula tied to company earnings, especially when it includes an exclusivity clause to prevent negotiations with other prospects. Most owners are delighted to get such a generous offer, and happily sign the exclusivity agreement. Then the fun begins.

Despite promises of a speedy sale, the due diligence phase drags on longer than expected. Meanwhile, the owner postpones key expenditures which will affect earnings and thus drag down the sale price. Then the buyer begins demanding “emergency” meetings, often at inconvenient times, disrupting the owner’s routine and increasing stress levels.

With the owner mentally checked out of the business and worn out from due diligence – and the business suffering from a cutback in critical expenditures to pump up earnings – the business unsurprisingly suffers a temporary slump. The buyer wants the company’s performance to suffer a little so they can use it to drive down the price. Beat up by the entire process, the owner will be more likely to give in to all kinds of last minute concessions affecting the final price of the business.

How do you avoid this unpleasant outcome? Start by enlisting a good business broker. If a serious prospect wants an exclusivity agreement, limit it to 30 days and require a big deposit that will be forfeited if the deal doesn’t close. And do your best to insulate yourself from the transaction. Have a trusted executive work with your broker as a go-between with the buyer, and push back against last-minute demands for meetings.