Customizing Your NDA for Competitors

Another point worth making again is – confidentiality is critical.

Keeping the details of your business secure is of paramount importance throughout your sales process. You want to maintain control over your sensitive business information while still approaching potential buyers, including your competitors, especially when a competitor approaches you. If you’re dealing with a direct competitor, it may be wise to have your attorney prepare a customized NDA. In this section, I offer advice on how to protect your sensitive business information from direct competitors who you may end up in conversations with.

Here are six tips on how to strengthen your NDA when dealing with competitors. 

Tip 1: Prepare a Buyer-Specific NDA

Have your attorney prepare an NDA that’s specific to the buyer you’re negotiating with. A standard NDA is normally sufficient during the preliminary stages. But if you’re dealing with a direct competitor and are releasing highly sensitive information, your attorney should customize an NDA for that specific buyer. 

Tip 2: Prepare a Separate NDA for Different Categories of Information

Separate NDAs can be prepared for various categories of confidential information. For example, the following scenarios may require a different set of legal strategies and language to protect you – if the buyer meets with key employees vs. if the buyer meets with key customers vs. if you share proprietary pricing with the buyer.

Confidentiality is critical.

Tip 3: Customize the NDA

An NDA often must be customized for certain types of buyers. For example, a wealthy private individual should be dealt with differently than a direct competitor. Private equity groups are also managed differently than competitors. 

The process should be more stringent with competitors since these transactions represent more risk to you. The protection an NDA offers varies based on the language contained within it. In middle-market transactions, the NDA is commonly negotiated with buyers, especially if the buyer is a potential competitor.

To determine which clauses to consider modifying in an NDA if you’re dealing with a competitor, consider the following questions:

• Is information that’s communicated orally included? 
• Is “derived information” included?
• Is the fact that your business is for sale considered confidential information?
• What’s the definition of “representatives?”
• What’s the definition of “confidential information?”

You can also consider addressing the following in your NDA when dealing with a competitor:

• Non-Solicitation: Include language in which the buyer agrees to not actively solicit your customers, suppliers, or employees. 
• No-Hire: You can also include an outright restriction on hiring, such as a no-hire, in which the buyer agrees not to hire your employees, as opposed to not soliciting them, although many buyers will resist such a restriction. 

Tip 4: Ask the Buyer’s Representatives to Sign an NDA

Always ask the buyer to obtain a signed NDA from their representatives before releasing your information to them. If the representatives don’t sign your NDA directly, the buyer should be held liable for any breaches made by their representatives. The buyer should also disclose their representatives’ names and contact information if they receive information on your business to avoid your confidential information from being widely disseminated without your permission. 

Tip 5: Have the Buyer Sign Multiple NDAs

You can also consider asking the buyer to sign a different NDA at various points in the transaction as the negotiations advance. Each NDA can contain progressively more restrictive language and terms as you release more sensitive information. 

For example, a buyer may not be interested in signing an NDA that contains a non-solicitation or a no-hire clause early in the process. But the buyer may agree to this language in an NDA later in the process if you agree to let them meet with your employees during due diligence. 

Your attorney may need to draft an NDA before you allow the buyer to meet with key customers. This is rare in most transactions, but there may be cases where customer concentration is an issue, and the buyer may ask to talk with key customers before they agree to the closing. If this is the case, it may be necessary to negotiate an NDA with the buyer before allowing such conversations to take place.

Tip 6: Clauses to Consider Modifying

Here are some additional clauses within the NDA that you may consider modifying:

• Definition of Confidential Information: This is a commonly negotiated section. Many agreements broadly define confidential information and then make specific exclusions. This section should specifically address any confidential information you’re particularly concerned about.
• Definition of Representatives: Many NDAs allow the buyer to share sensitive information with their “representatives” without your explicit consent, but some agreements don’t define what a representative is. The NDA should require that the buyer obtain your consent before releasing the confidential information to third parties, including their representatives. The agreement should also define who and what constitutes a representative.
• Permitted Uses: The NDA should state that confidential information can be used only for purposes of evaluating the transaction.
• Return or Destruction of Information: The NDA should require the buyer to return or destroy the information if they decide not to pursue the transaction, although this clause is often irrelevant given the current state of technology.
• Access to Employees: This is a hotly debated topic. All NDAs should restrict access to employees in the early phases of the transaction. If you wish to grant access to your employees, I highly recommend having your attorney draft an NDA that addresses non-solicitation of your employees before you allow the buyer to meet with them.
• Non-Solicitation of Customers, Employees, and Suppliers: This is also hotly debated. Some buyers may refuse to sign an NDA that contains this language in the earlier stages of the transaction. You can soften this by stating that the buyer agrees not to actively pursue your employees but that your employees can be hired if they apply through general employment advertisements. Solicitation of your customers can also be addressed if you allow the buyer to meet with your customers.
• Disclaimer Regarding Accuracy: To protect yourself, the NDA should state that you’re making no warranties regarding the accuracy of the information.
• Term: All NDAs should include a definite term. Most NDAs contain a term of two to three years. Go for the longest term you can get away with.
• Choice of Law: I recommend choosing your home state.
• Injunctive Relief: The NDA should specifically allow you to obtain an injunction in the event of immediate damage.