Non Disclosure Agreements

By Tom Taulli

Selling a business is no easy feat. For most sellers, the process is daunting and complicated. You will learn about such things as "representations & warranties," "asset sales," and "indemnification." You practically need a law degree to keep everything straight.

A big disadvantage for most sellers is that it is the first time. The buyer, on the other hand, is likely to have done several of these transactions and has leverage.

What are some of the things a seller should be aware of? One is confidentiality.

Let's face it, change is usually very stressful. If your employees learn about your intention to sell the business, they may fear for their jobs. Or, your suppliers may be concerned about the account. Or, your customers may be concerned, as well.

As a result, it is a good idea to keep pre-deal negotiations confidential. And an effective method to accomplish this is through a confidentiality agreement.

A confidentiality agreement need not be a legal treatise; rather, it could be just a few pages. But, this does not mean you should avoid having some legal help. Actually, it is extremely important to have a trusted legal advisor craft a strong confidentiality agreement. But before doing this, you can take some preliminary steps:

1. What is protected? As the seller, you want to be broad in your scope. You might have proprietary formulas or marketing plans and other important trade secrets that you want to protect. Obviously, you do not want these to find their way to your competitors. In the confidentiality agreement, you can list the type of information that will be disclosed ó but you should also indicate that the agreement is not limited to only this information.

2. How long? You can require confidentiality to be kept well-beyond the ending of negotiations. It is not uncommon to have a term of two or three years.

3. What if negotiations end? If so, require that the buyer return all documents or have them destroyed. Everything should be accounted for.

4. What are the damages? You should state that you have available all possible damages. You should also specify that you can seek a preliminary injunction, which is a court order to prevent another organization from using your proprietary information.

5. Who is party to the agreement? Make this not only the corporation, but also its management and regular employees, as well as advisors (such as brokers, attorneys, and accountants).

6. What if there is a dispute? Disputes happen in M&A transactions with frequency. So, make sure the contract indicates how the dispute will be resolved. One idea is to require arbitration, which tends to be less expensive than full-blown litigation. Furthermore, indicate what state law is applicable and where the case will be tried (make it local to you).

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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