This is one of the easier topics to address. A Non Disclosure Agreement (NDA) is pretty common in almost all deals involving buying a business. Most are pretty standard but that does not mean you should not read them.
Because we do not want to be sued, and our lawyers said we have to say this, I have to tell you that we are not lawyers and we are not giving you legal advice…
What is a Non Disclosure Agreement (NDA)
A Non Disclosure Agreement (NDA) is sent to potential business buyers by the business seller, or if they are represented by a business broker, the broker will send it to you. There will be a whole bunch of fancy legal writing but the agreement will basically say that the seller has made private confidential information about them and their business available and is willing to share that information with you once you sign the NDA.
By signing the NDA, you agree not to disclose any of the information provided to other people, except for a few people we will mention later in this article.
Generally, the NDA will cover these areas:
- Anything about the business they send to you
- Anything they tell you on the phone
- Anything they say or provide to you during meetings
- Anything the broker says or gives to you
- Anything an employee or manager of the business says or gives you
Other items covered in an NDA
It is possible that the NDA will also mention some of these issues as well:
- Something that says the broker represents the seller and not the buyer and is not giving legal advice
- A butt-covering statement that the broker is not the source of the information and it is up to you to verify if it is true or not, and they are not liable if it is all BS information
- Maybe something that says you have the financial capability to actually buy this business and you are not wasting everyone’s time.
- It may say that you will not contact the seller directly without the broker’s consent
It is important to know that just because someone sends you information after you sign an NDA, that does not mean it is 100% accurate and true.
Expert Tip -> During Due Diligence, it is extremely important that you verify all information that is provided to you that is critical to understanding how a business is performing.
Who can I share the confidential information with?
You should be careful about sharing information you received from a seller or a broker. The information is often very critical to running the business like customer lists, pricing, financial reports, names of employees, and business tax documents.
You can see why a business seller would not want this out in the open.
Most NDAs will mention that you can share it with people who will help you evaluate the company and make a decision about buying it. For example, here is language from an actual NDA I signed:
Recipient agrees not to disclose in any form information regarding Seller’s business or the fact that the information has been made available to Recipient or that Recipient has reviewed any portion of such information, or the fact that discussions or negotiations are taking place concerning a possible transaction, if any, including the status thereof to anyone except those who have a need to know aboutthe possible transaction for the purpose of evaluating the possible transaction or who may be directly involved in the possible transaction contemplated by this Agreement including Recipient’s financial and legal advisors. Such parties shall be made aware of the confidential nature of the disclosed information.
You just got to love when lawyers take something simple and make it a work of art.
Sample NDA to review
Here is a very generic example of an NDA just to get you familiar with the language you may see.
Again, we are not lawyers and we are not giving legal advice. We also do not give marital, parenting, and choice of whiskey advice.
Pro Tip –> All NDAs are different so don’t expect that the one you get from a broker or business seller will look exactly like this.
One more thing about Non Disclosure Agreements
Every once in a while you will see a seller try to add a Non-Compete section into an NDA. If you are in the same industry as the business you are considering buying, you should be very careful with any non-compete language in a contract.
If you get confidential information from a company and end up not buying it but starting a competing business, the seller may have an issue with you.
Be very careful requesting confidential information and signing NDA’s if you will end up competing with a company. Lawyers love this kind of conflict.
Go deeper
If you need to get up to speed on NDA’s and other business buying issues you should consider taking a look at the Practical Guide to Buying a Business provides a comprehensive overview of the acquisition process—from locating a business to the final contract. The information is presented sequentially with sample forms, checklists, and agreements.
Click on the book image to learn more.
The bottom line on Non Disclosure Agreements
Once you have seen a few NDA’s you will become pretty comfortable with them. They are standard parts of buying a business and are almost always required by sellers and business brokers.
If you do not understand an NDA or any other document you are asked to sign, please consult a lawyer or legal expert (we are not talking about your brother-in-law who “knows stuff”).
Now, get out there and find a business to buy!
