NDAs: Why They Are Needed?

A non-disclosure agreement, or NDA, can be a very valuable document during the purchase or sale of a business. Perhaps someone has brought up the idea of drawing up an NDA during your current negotiations to purchase or sell a business, and it left you wondering if one is really necessary. Our opinion is that it is, and here's why.

What Is An NDA?

A non-disclosure agreement, also sometimes known as a confidentiality agreement, is a binding contract between two parties that serves to protect confidential or sensitive information. The NDA restricts or forbids the disclosure of such information to any other party.

How NDA’s Benefit the Seller

Under normal circumstances, a business owner will not readily share financial and operational information about his company. If certain sensitive information, such as pricing, supplier data, strategies, or trade secrets was made available to the competition, it could cause irreparable damage. During the sale of the business, however, it becomes necessary to share that information with potential buyers. Once the seller has ascertained that a potential buyer is serious and has the financial ability to make the purchase, he will more readily share that information if an NDA has been signed.

Over the course of the sale and purchase of a business, there are different levels of confidential information that will need to be shared. At the very early stages, a possible buyer will want to see the company's financial statement. This data will give the buyer the vital information to decide if they're interested in pursuing the purchase of this business. As such, a buyer may opt for a separate NDA covering only the financial statement or structure the NDA in such a way that allows for the disclosure of the financials first, followed by more sensitive operational data once the buyer has passed specific milestones.

Buyers not interested in signing NDA’s are likely to be perceived by the seller as not being serious about the purchase, and can, therefore, prevent a lot of wasted time and energy.

How NDA’s Benefit the Buyer

For an entrepreneur looking to buy a business, having a signed NDA is critical to have the ability to study the business in detail. Through a comprehensive examination of the company's records, a potential buyer can analyze its strengths, weaknesses, opportunities and advantages within the current market landscape. It is only with all of this important information that a buyer can determine if the asking price is reasonable.

With an NDA in place protecting the seller's interest, there should be no reason that he or she would want to avoid disclosing any pertinent information. If the seller is less than forthcoming, it may set off alarm bells for buyers and lead them to question the true viability of the business.

What Should Be Included In an NDA?

• Information about the business, such as its name, address, and the nature of its operations.
• The duration of the NDA. Most NDAs are in effect for several years.
• The parties to the agreement. This indicates with whom sensitive information may be shared aside from the buyer.
• What information is covered by the NDA.
• How the information will be supplied and when. In most cases, the disclosure takes place at the seller’s office and buyers do not feed with any of the documents.