Ask the Advisor - Why Do I Need a Confidentiality Agreement When Selling My Business

Confidentiality or nondisclosure agreements are cornerstones of most M&A deals. Although it can be time-consuming to draft, sign and keep track of these multipart documents, they are one of a seller’s best defenses during deal negotiations.

Staying Safe

To properly assess your business, a potential buyer will need access to internal, often sensitive, information — from sales numbers to employment figures to growth projections. Although your prospective buyer is likely operating above-board, there’s always a risk that, if deal negotiations fall apart, a buyer might use such confidential information for its own gain. For example, a former suitor could use what it has learned about your customers to lure them away. 

That’s where a confidentiality agreement comes in. This legally binding contract generally:

  • Defines “Representatives. - The document lists specific people in the buyer’s organization who will represent it and be privy to confidential information. Each of the listed individuals may need to sign an individual confidentiality agreement as well.
  • Classifies Types of Information - Buyer representatives may be given access only to information that’s directly applicable to their role in the deal. So a CFO would be able to view financial information and an HR official would be allowed to interview specific employees, with strict limits on the type of questions that can be asked.
  • Clarifies Return Procedures - If a deal negotiation fails, all buyer representatives are expected to return the selling company’s documents in a timely manner.
  • Provides remedies. The agreement will list the extent of financial and other penalties in the event a prospective buyer discloses proprietary information.

Specific Protections

When drafting your confidentiality agreement, be as clear and succinct as possible. Among other things, it should forbid prospective buyers from speaking to other buyers about your company (whether indefinitely or for a set period). This makes it difficult for a buyer to use inside knowledge to launch a joint bid with another buyer, for example.

You should also include “standstill provisions.” These are designed to prevent a potential buyer whose offer was rejected from later mounting a hostile bid using your confidential information.

Maximum Security

To draft an effective confidentiality agreement, discuss with your M&A advisors what information needs protecting and how it can best be secured while still providing your buyer with what it needs. The clearer the language and the stricter you are about providing access to records, the more protection you’ll have.