fsolegal.com
legal pad.jpg

Briefs

fsolegal.com
briefs


BUYING AND SELLING A BUSINESS: Confidentiality Issues

Before a conversation about the possible sale of a business gets very far, both the buyer and seller need to be concerned about confidentiality.  Typically, this is addressed with a document styled as a non-disclosure agreement or a confidentiality agreement.  The terms are generally used interchangeably. 

In some respects, the seller may be more concerned about confidentiality than the buyer, so the seller should be quick to insist upon such an agreement before conversations get very far.  The fact that the business is for sale may be very damaging to the seller’s business if the transaction does not take place.  Likewise, the seller will, at some point in the transaction, be giving the buyer a great deal of information about the company.  Much of this will be proprietary and trade secret.  Its dissemination to competitors (and the buyer is often a competitor) can be disastrous to the seller’s business if the sale does not take place.  So, a confidentiality agreement is needed to make sure that the buyer uses confidential information only in appropriate ways. And, if the transaction is being structured as a merger or is going to have a significant earn out component, the seller will want to gather proprietary information from the buyer before agreeing to the transaction. 

But even the buyer can be concerned about confidentiality.  The fact that a buyer is looking at a particular business may tip its hand to its competitors in the marketplace.  

What is typically contained in a confidentiality agreement?  The first item that is usually addressed is exactly what information is deemed confidential and what is not.  Care needs to go into defining that idea.  Information that is available in the public domain generally cannot be granted confidential status simply by contract.  Also, a fair portion of the information that will be exchanged really is not proprietary in nature, so a broad definition may actually be difficult to enforce.  Frequently, there is a requirement to physically mark the information that a party deems to be confidential.  But regardless of how it is going to be addressed, this needs to be thought through.

Also, care needs to be given to describe exactly how the information can be used.  Generally, it should only be used in connection with the proposed sale.  However, I frequently see agreements that really do not describe with any clarity the project or transaction for which the information may be used.  The seller will want to make this as specific as possible to avoid a use of the information for some purpose that the seller did not foresee.

The agreement should also address who can view the data.  Frequently, buyers and sellers use teams of internal personnel and external professionals to assist with the deal.  This should be addressed in the agreement by providing that anyone who is given the information is made aware of the agreement and is bound by it in some fashion. 

If the transaction does not take place, the return of data and any notes and analyses made regarding the data should be required.

Finally, the deal may require something else to protect the parties.  One example might be an agreement that the buyer and the seller will not hire each other’s employees who are involved in the transaction for a period of time.  This prevents using the purchase negotiation as a backhanded recruitment tool to steal valuable employees from one another.

While there are any number of relatively standard forms of confidentiality agreements and non-disclosure agreements floating around in the business world, the use of a generic form, without sufficient thought and adequate customization, may leave significant holes in the protection that both parties seek in connection with a business sale.  

In our next article, we will look at considerations regarding letters of intent and term sheets.