A NDA is a term thrown around a lot during the beginning of the business sale process. It’s very important that you understand what it is and what it is not before you go into battle. First, I need to qualify myself here as I’m not an attorney and this is not legal advice. I am only giving you my opinion from a practical perspective of this legal document. To start, attorneys understand and explain the law but it is up to the individual owners on how they use this information. I’m more of a practical guy who likes to understand the laws but knows that there is more to it then that.
Wikipedia defines “a non-disclosure agreement (NDA), also known as a confidentiality agreement, confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement, as a legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish to restrict access to by third parties. It is a contract through which the parties agree not to disclose information covered by the agreement. An NDA creates a confidential relationship between the parties to protect any type of confidential and proprietary information or trade secrets. As such, an NDA protects non-public business information”.
The point of the non-disclosure agreement is to protect the seller from buyers who take non-public information learned during the escrow process and use it without compensation. When you sell your business there is a certain amount of private information that will be exposed to the buyers in order for them to evaluate the sales price. This information provided is protected by an NDA whereas (that’s lawyer speak right there!) the buyer cannot take this and tell anyone else or use it
A typical scenario where an NDA would be smart to have is when a buyer is actually your competition. You open the financial books, show them your history and client list, disclose your patents and layout your business plan in order for them to evaluate your value. They then take this information back to their nest and use it against you. Don’t be surprised because it happens all the time. Think about how many times you have walked around houses for sale even thought you don’t want to buy it. You look around, get ideas and learn whatever you can. It happens all the time in both home sales and business sales.
Be aware that just because you have a signed NDA does not mean that you can enforce it. Proving that a potential buyer gained information that you should be compensated for is a difficult task. Things like patents or products are easier to prove but there are companies out there where all they do is knock off’s of successful new lines. It is very difficult, thus expensive, to prove that you lost your top customers, key employees or business plan to another company.
Now, practically speaking all legal documents is only good if they can be enforced. To be enforced you need to show breach of contract and damages. The moral of the story here is unless you have money to defend your NDA and have something that someone would actually take that causes you financial damage then don’t worry too much about an NDA. I think they are a good idea to have in place and would always encourage business owners to have all potential buyers sign them. It’s better to have in place and not use then wish you had them later.
Just be a little street smart and protect your valuable assets. I hear that only 30% of the business transactions close after they get into escrow so go in it with your eyes wide open. A NDA is a good idea but don’t think that just because they signed something that they will follow the law. I hate telling people that I told you so.