Effective Use of Nondisclosure Agreements in Selling a Business

A nondisclosure agreement can play a vital role in the process of sale of a business. An NDA is a legally binding contract that establishes a confidential relationship between the seller and buyer, providing that any proprietary or sensitive information revealed during negotiations remains protected. Without an NDA, there is a risk this information could be misused or shared with competitors, leading to potential financial loss or damage to the seller’s reputation. 

During a business sale transaction, the seller often needs to share sensitive information with potential buyers. An NDA provides a safe harbor that not only protects the seller’s interests but also fosters trust between the parties, allowing for open and honest discussions. While a general prohibition against disclosure may seem sufficient, it is to the seller’s advantage to make the NDA specific about what types of information and what uses of that information are covered, as this makes the agreement easier to enforce.

An NDA should clearly define what constitutes confidential information. It should include any data that is not publicly available, such as the selling company’s trade secrets, intellectual property, customer and supplier information, financial records, operational processes, economic forecasts and plans for expansion. It should also cover the terms of the transaction under negotiation, including the contents of a letter of intent or other preliminary correspondence.

The NDA also should specify the prohibited uses of covered information. The receiving party should be prohibited from disclosing the confidential information to third parties, reproducing it without the express consent of the disclosing party or using it for any purpose other than the evaluation of the business sale. 

However, exceptions can be made to these confidentiality obligations, such as for information that:

• becomes publicly available through no fault of the buyer
• was already known to the buyer prior to disclosure
• is independently developed by the buyer

Exceptions also should be made for information that is required by law to be disclosed, such as to government agencies, provided that the buyer must notify the seller in advance. 

It is advisable for the seller to engage a skilled business transactions attorney to create an NDA the is comprehensive and aligned with the goals of the transaction at hand. An attorney can ensure that the NDA not only protects sensitive information but also addresses potential legal pitfalls that could arise during the negotiation process.

The Law Offices of Donald W. Hudspeth P.C. in Phoenix offers experienced legal assistance in business sales, including the drafting of all necessary agreements. Call us at 866-696-2033 or contact us online to arrange a consultation.