Non-disclosure Agreement

What is a non-disclosure agreement?

A non-disclosure agreement ensures that a certain party keeps information learned throughout an engagement confidential. A non-disclosure agreement (or, "NDA") can be one-way or mutual. In the case of a mutual NDA, both parties agree to keep any information confidential, whereas in the case of a one-way NDA, only one party is required to keep such information confidential.

For the purposes of a business transaction, normally the NDA is one-way: the buyer agrees to not disclose any information learned throughout the engagement.

When should I use an NDA during a transaction?

An NDA is very useful for an owner to keep the sales process confidential. Typically, the NDA will cover three forms of confidentiality: (1) that the buyer won't disclose that the business is for sale, (2) that the buyer won't disclose any details about the business she learns during talks or diligence, and (3) that the buyer won't use information learned to open a competing business.

With that in mind, it's important the NDA is executed as soon as the buyer expresses interest in learning more about the business. At this point, normally the buyer has only seen a listing with no identifying information about the business.

The owner can then feel free to share information about the business, its financials and any assets or employees once the buyer has executed an NDA.

What's included in a non-disclosure agreement?

A basic non-disclosure agreement has a number of parts. Below are the highlights of each one.

The Parties

At the beginning of the NDA, there will typically be a definition of the parties to the non-disclosure agreement. Normally there are two: the business entity and the buyer (or, "recipient" of information).

This section may also include the address information for each party to make it even more clear who each party is.

The Information

During business transactions, the information is typically deemed any internal, non-public information. This can be financial information or knowledge of a client roster.

The mechanism by which the information is transmitted matters, too. For instance, most NDAs will define such information as being "furnished" or "obtained" from now and in the future.

The Scope of Obligation

The scope covers who, if any one, the buyer can tell about the information and how the information can be used.

For instance, normally the information can only be disclosed to the buyer's accountants, attorneys and other confidential advisors on a "need-to-know" basis for assisting in the possible acquisition.

Additionally, the buyer is only allowed to use the information in evaluating the purchase of the business. She's not allowed to take the information and start a competing business that tries to steal all of the owner's clients. She's not allowed to take the employee list and try to poach employees for her own shop.

Any Exclusions

A non-disclosure agreement typically excludes certain information from being covered. For instance, any public information is excluded. While a buyer cannot disclose that the business is for sale, it would be unreasonable if the buyer was expected to keep a secret that there was an auto shop on a certain corner.

The Term of Agreement

The terms of the agreement cover the time frame for which the agreement stands and what happens to the information.

Some NDAs will not define a fixed timeframe, while others will set the timeframe to be between 2 and 5 years, as most information gets stale after a while anyway.

The agreement will also contain language around what needs to happen should the business acquisition not occur. Often the buyer will be required to return or destroy any information received or obtained during the engagement.

The Jurisdiction

Lastly, in the event of the NDA being broken, the agreement covers the jurisdiction of any litigation. Often this will be the location of the seller, as it would be inconvenient for her to travel to enforce the agreement.