The Role of Confidentiality Agreements in Business Acquisitions – Secure Confidentiality Before Negotiations Begin

(First in a four-part series describing key stages in buying and selling businesses)

So, you think it may be time to explore selling your business and you have identified a potential buyer. Before that meeting at the club, or over some drinks… make sure to secure a well-constructed Confidentiality Agreement, also known as a Nondisclosure Agreement, from the potential buyer. While confidentiality can be important for a buyer, it is typically critical for the seller. Public knowledge of the existence of discussions, or leaking of financial, business or other proprietary information exchanged as part of those discussions, can significantly harm a seller’s ongoing operations, revenues, asset valuations, and /or future prospects.

In its simplest form, a Confidentiality Agreement:

  • Identifies the parties
  • Defines what is (and is not) confidential information
  • Identifies permitted disclosures, e.g. to third-party advisors, lenders, key employees, or regulatory agencies
  • States the time and manner of restriction
  • Provides for the return or destruction of confidential information
  • Defines remedies for breach.

The art of drafting the Confidentiality Agreement, however, is tailoring the terms to the transaction being considered and to the particular interests of the parties involved. Provisions may vary for different industries, for publicly traded versus private companies, and for strategic versus financial buyers. The nature of the parties’ relationship prior to the discussions will also impact the scope and provisions included. For example, how broadly confidential information is defined requires care to balance the disclosing party’s desire for maximum protection with the receiving party’s desire to minimize exposure to future liability in the event the deal does not proceed. This is especially true when the prospective buyer and seller are in the same industry or may be competitors. Depending on the circumstances, it may also be important that a seller disclaim warranties of accuracy or include provisions that prohibit employee solicitation or prevent hostile takeovers.

These sensitivities are best addressed at the outset of acquisition negotiations, where optimism and cordiality between the parties provides the best opportunity to arrive at an agreement that will fairly and appropriately address the respective interests of the parties.

Although it may be tempting for a potential seller to save on legal bills by pulling a Confidentiality Agreement off the shelf from another business transaction or from the Internet, such agreements may not adequately protect the seller in the context of this transaction with this potential buyer. Involving legal counsel prior to beginning any discussions with a potential buyer can pay huge dividends down the line, at a relatively low cost. Experienced counsel can quickly identify those areas of a confidentiality agreement that need to be tailored to protect his or her client’s interests. This also holds true for the buyer considering signing an agreement presented by a seller, where it’s vital to understand the restrictions and obligations contained in the agreement and how they may affect the buyer’s future business dealings.

For more information regarding Confidentiality Agreements, please contact Katherine Pandelidis Granbois, Esquire. Kathy is a Shareholder in the Business and Corporate Law Group at Saxton & Stump, LLC.

Next in the series – Letters of Intent: To Enter or Not to Enter?

March 2018
Professional: Katherine P. Granbois, Esq.

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