What to put in a confidentiality agreement when selling your business

< back to all business news articles

17/10/2017

When you decide to sell your business, you’ll need to provide enough information for a potential buyer to make a decision. Some of this will be sensitive information about your sales, profit, customers, business processes and know how. Potential buyers will want to see this information but as the business owner, you may want to limit what buyers can see, and prevent that information from going any further. Having a potential buyer sign a confidentiality agreement or non-disclosure agreement (NDA) gives you some protection. If they do breach confidentiality you’ve a better chance of taking legal action and seeking damages if they have signed a document promising not to breach confidentiality.

Although keeping elements of your business secret is important, you do need to balance it with the buyer being able to complete robust due diligence and find out what makes your business tick. One way to limit who gets your information is to disclose only parts to general queries, and then only full disclosure to seriously interested parties.

When you're selling your business, you’ll probably use your lawyer to draft this confidentiality agreement for interested parties that suits your business. In some cases, you may also get your employees to sign as well, especially if they are involved in the sale process. Get legal advice to make sure all the boxes are ticked and that the agreement contains everything it should.

Benefits of a confidentiality agreement

There are several good reasons, including:

• Keeping news of the potential change of ownership from being released to customers. You want the business to continue as usual.
• Selling a business can be unsettling for current employees, who may worry about the security of their jobs and might even consider it an opportune time to leave. You’ll want to retain any key employees in positions of trust.
• It helps protect the financial and intellectual property rights of the business. If a potential buyer decides against the purchase, the agreements reduce the likelihood they will reveal any information they learned while conducting their due diligence.
• Potential buyers will feel more secure knowing that the information is protected - so when ownership changes hands, any sensitive information which they take ownership of will become public knowledge.
• Potential buyers who are serious will expect to sign an NDA, and failure to provide one may reflect poorly on your professionalism.
• A potential buyer who refuses to sign an NDA is either not really interested in buying the business, or they are inexperienced in how the process works. It’s a useful test.

Aside from the agreement itself, it's important to keep your intention to sell your business confidential until you're ready. If word leaks out prematurely, customers may alter their buying behaviour or speculate as to why.

Pre-qualify potential buyers

Before placing the NDA in front of a potential buyer, you can save yourself a lot of time by making sure they're a genuinely interested party with the means to purchase. An effective way to pre-qualify prospects is to describe your business and response requirements in a way that helps unqualified buyers opt themselves out. In every ad you place, in print or online, ask potential buyers to provide the following information:

• What they're looking for in a business purchase
• Their purchase timeline
• Their related business experience
• If they have the means to buy your business

You can cover this request in one sentence such as:

Please outline your related business background, the type and size business you seek, your investment capability and your interest in this business.

It’s almost like a job interview. People that are genuine will not have an issue providing you with this information. Ultimately you’re trying to find a person that not only will be able to afford your business, but one that fits with the culture of your business.

Creating the NDA

Most agreements are pretty standard. The potential buyers agree:

• That any information provided about the business is confidential
• Not to divulge that information to anyone else, including the fact that the business is for sale
• To return all business records and data to the business owner after it has been reviewed
• Not to make any copies of that information
• Not to contact the business's employees, customers or suppliers
• That it's their responsibility to make an independent verification of the information provided
• To allow the business owner to obtain financial and credit information about them, so they can verify they're capable of purchasing the business

Your lawyer will draft an agreement that lays out these terms in more formal, legal language. However, if you're not using a lawyer, you can download NDA templates that include all the necessary information. The Law Depot UK has free NDA templates that can be quickly and easily customised for your business.

Summary

Selling your business is exciting, and for some may even have been their end goal. The last thing you want is for sensitive information to leak, causing damage to your business and unrest among your staff. A confidentiality agreement helps reduce the chance this will happen and protects potential buyers who are assessing your business - one less thing to worry about.

Additional resources

• When selling a business confidentiality is key
• How NDAs work and why they’re important