(This column originally appeared in Accounting Today)
You’re preparing to potentially put your business up for sale and now you’ve reached a critical moment: bringing in a prospective buyer.
For years you’ve built up your business with practices, policies, procedures and proprietary ways of doing things and let’s all agree: You have many confidential things that you’d like to keep confidential. But if you’re going to sell your business, a prospective buyer will understandably want to know these things.
They’ll want to know how you price, what you pay, how you buy and how you manage your employees. They’ll want to see your private contracts with customers, suppliers and partners. They’ll want to look at any patents or trademarks you own, or that you’re developing. They’ll want to inspect your warehouse, your property, your equipment. They’ll want to talk to your employees about what they do and how they do it. They’ll want to see your most confidential financial information — statements, tax returns, budgets and forecasts. They’ll want to scrutinize your core operational data.
Buyers are not being unreasonable. They need to do these things in order to determine whether or not they want to buy your company. But you have concerns. Big concerns.
That’s because the prospective buyer may be from your industry. It may even be a competitor! Or at least an investor in a competitor. It could be a much larger company or it could be a smaller rival.
Does that make you uneasy? It should. After years of building your business, you’re now going to be allowing someone to literally learn all of your trade secrets to someone who — and let’s face it — may or may not in the end be purchasing your company.
So how do you protect yourself? Many advisors say that you can do this by having these prospective buyers sign a non-disclosure agreement, or NDA. I say … not so fast.
If you’ve been running a business I’m sure you’re aware of what an NDA is. You’ve probably been asked to sign one. Or maybe you require some of your employees to sign one. They’re a popular tool that can provide some — some — protection for your proprietary information. A good NDA will include a scope, specify the information shared, allow a time frame for confidentiality and lay out the consequences of violating the agreement. If you want some great advice for constructing a strong NDA, then you’ll enjoy the information .
As popular as they are, they can be controversial. NDAs have come under scrutiny recently when they’re connected to employment. Just last year, Congress passed legislation that allows victims of sexual harassment incidents to violate their NDAs with their employers so that they can speak out against the abuse. Elon Musk made NDA in early 2022 when executives of Twitter at the time accused him of violating their mutual agreement after he disclosed as part of his due diligence some of their internal testing practices (Musk ultimately purchased the company and little came of the claim).
But putting aside the media attention, the real question for the seller is whether or not an NDA is truly effective for guarding your most secret of corporate secrets. The answer is no. Why? Because there’s a real world and a theoretical world.
In the theoretical world, a potential buyer signs your very detailed NDA and performs their due diligence on all of your information and even if the transaction doesn’t go through, they do nothing with what they’ve learned. If you come upon evidence that the person or organization used your information in their business — for example, going after your customers or revealing pricing or practices or weaknesses you have — then you reference the NDA and go after them in the courts.
But that’s all in the theoretical world. The real world is very different. You and I both know that, given a bunch of proprietary information, a potential rival will use it. We also know that it’s unlikely you’ll find out about this breach, or be able prove it. We also know that if the rival is big enough, they’ll likely have the resources to fight any claim you make, or at least cause you and your business much harm while that claim is pursued.
So do you use an NDA for a prospective buyer of your business? This is not the right question because the answer is obviously yes. NDAs do serve a purpose. But instead of asking this question you should be asking something else: When should I use an NDA for a prospective buyer?
Of course, the answer to that question is, “It depends.” It will depend on when you’re convinced that the prospective buyer is a legitimate buyer with genuine interest where you feel pretty certain that, assuming the due diligence goes well, they’ll move forward.
Which means that you have to do your due diligence first. How? By interviewing their management and looking at some of their documentation. Are you convinced that this is a real buyer with real interest? Do they have the funds to do this? Do they have good reasons for buying your business? Do they have a history of other acquisitions? Do they appear ethical and have good references? Before you start sharing your most confident information you’ll want these questions answered.
To do this, I bet you’ll be asked to sign the prospective buyer’s NDA first. Who knew?
So yes, you should use an NDA for when a prospective buyer is looking at your company. That’s the easy part. The more difficult question you’ll have to answer is when.