Screening Buyers

Just as buyers perform due diligence on you and your business, performing due diligence on buyers is paramount. In fact, one of the most time-consuming yet critical first steps in the sale process is screening potential buyers. Its importance cannot be overstated.

A major mistake entrepreneurs make in the early phases of a transaction is wasting energy on buyers who aren’t qualified and judging the attractiveness of an offer without first obtaining background information on the buyer. 

Before you invest time and energy in negotiating with prospective buyers, you first want to establish that they’re motivated and financially capable of purchasing your business. Doing so will help ensure you’re negotiating with a qualified buyer and motivate you to invest more energy into the process.

Most buyers who aren’t serious won’t go to the trouble of completing a detailed buyer profile and personal financial statement, so the fact that the screening process takes time will itself help weed out tire kickers. Once the buyer submits an offer, they should submit source documents to verify their financial ability to complete the transaction, which will allow you to screen the buyer more thoroughly.

Don’t waste your time and energy on buyers who aren’t qualified. 

Part of your initial due diligence is to assess the buyer’s motivation. When dealing with potential buyers, ask yourself: 

  • How motivated does the buyer appear? 
  • Do they quickly return your calls and emails? 
  • Are they eager to move forward, or do they seem overly critical? Overly critical buyers usually don’t have serious intentions of buying a business.

The process may change slightly depending on whether the buyer is an individual, a company, or a private equity group. It is worth noting the process for screening an individual is different from screening a company.

The sale of a business can be compared to a sales funnel. There are major steps along the way, and buyers drop off at each step.

How the Numbers Break Down

Here is how the numbers might break down on a typical transaction:

  • Interested buyers: 100 
  • Buyers who will sign a non-disclosure agreement and receive your CIM: 20 to 25
  • Buyers who will respond with questions or interest: 15
  • Buyer meetings: 5 to 8
  • Second meetings with buyers: 3 to 5
  • LOIs received from buyers: 1 to 3

As you can see, the sale of a business can be compared to a sales funnel. There are major steps along the way, and buyers drop off at each. 

By examining the major stages of selling a business and preparing for each one, you can dramatically improve the chances of a successful sale. Let’s take a more detailed look at why you should perform due diligence on prospective buyers.

Reasons for Screening Buyers

Looking into buyers is not only a good business practice, but will save you time in the long run. Let’s look at some reasons why:

  • If you’re financing a portion of the sales price, you should screen the buyer just as any bank would.
  • You want to ensure they will qualify for the lease and don’t want to waste their time. You may also have to remain on the lease as a guarantor, in which case you will want to ensure the buyer is qualified and is unlikely to default on the lease.
  • Make sure they meet any requirements for a franchise, license, or any other qualifications required by third parties.
  • Verify that the buyer has the cash down payment before investing significant time or money in performing due diligence. Due diligence is a serious commitment for you and can cost you thousands or tens of thousands of dollars in professional advisor fees paid to attorneys, accountants, and other third parties. Any prudent seller will want assurance that the buyer has enough cash to complete the transaction before they make this investment.
  • Even if the buyer is paying all cash and no third-party approvals are required, fraud and theft are still a risk for any seller. You will be giving the buyer access to highly sensitive information such as bank statements and tax returns. Screening the buyer gives you confidence you’re dealing with a legitimate party.

Use a Phased Screening Process

A phased screening process involves screening buyers in phases or stages. This is necessary because most buyers will refuse to be thoroughly screened at the initial stages, particularly before seeing information on your business and deciding they’d like to take a closer look.

For example, if you were to ask a buyer for a financial statement, bank statements, tax returns, and other documents early in the process, most would refuse. The solution is to ask the buyer for this and other qualifying information in stages as the buyer progresses through the steps in buying your business.

Releasing information in phases saves time, preserves confidentiality, and ensures that unqualified buyers aren’t provided sensitive information about your business.

The first step in determining if they’re serious is to ask the buyer to sign a non-disclosure agreement (NDA), buyer profile, financial statement, and disclosure statement. Once buyers have completed these documents, they will then have access to your CIM with more details on your business.

If the buyer is interested once they review your CIM, they may:

  • Ask to meet you personally. 
  • Request additional information, such as financial statements, prior to meeting you. 
  • Should the buyer decide to make an offer, they may also have to disclose more detailed information about themselves, including a detailed financial statement, buyer disclosure agreement, bank statements, tax returns, and more. 
  • Most of this information is provided after an offer has been accepted, but some is provided before if you are financing a portion of the purchase price. Doing so allows you to evaluate the buyer’s creditworthiness before committing to a seller note.

When selling a business, the process looks like this: 

  • The buyer signs a non-disclosure agreement (NDA), buyer profile, financial statement, and disclosure statement.
  • The buyer receives your CIM.
  • The buyer requests additional documents, such as financial statements on the business or requests a meeting with the seller.
  • The buyer submits a letter of intent (LOI).
  • You review the buyer’s information and accept, reject, or counter the offer.

If the offer is accepted, due diligence begins, and a further mutual exchange of information ensues. For example, the seller may perform a background check on the buyer, hire a professional to investigate the buyer, if the seller is carrying a note, or request other financial documents, sometimes required if the seller or bank is carrying a note.

In the beginning of the sales process, you’re making claims that aren’t verified until an offer is accepted and the buyer moves into due diligence. 

Releasing information in phases saves time, preserves confidentiality, and ensures that unqualified buyers aren’t provided information about your business.

Know What To Release and When

Information about your business should be released to the buyer in phases, in a specific order, as the buyer expresses their interest and provides documentation to confirm their financial and operational qualifications to purchase your business. 

Let’s clarify what information is regularly shared with buyers.

Information regularly shared with buyers before an LOI is accepted:

  • Teaser profile
  • CIM
  • Profit and loss statements 
  • Balance sheets
  • Asset list

Information regularly shared with buyers after an LOI is accepted:

  • Financial and tax
  • Cash flow statements
  • Bank statements
  • Federal income tax returns
  • Payroll and sales tax reports
  • Merchant account statements
  • Accounts receivable and payable schedule
  • Legal
  • Copy of lease for premises
  • Copies of supplier and vendor contracts
  • Advertising contracts
  • Copies of equipment leases
  • Copies of material contracts
  • Copies of any other third-party contracts
  • Franchise-related documents
  • Insurance-related documents, such as policies, workers’ compensation, health insurance, and liability insurance
  • Environmental documents and inspections
  • Operations manual
  • Inventory list
  • Marketing material and collateral
  • Copies of licenses, permits, certificates, and registrations
  • Details on staffing and payroll-related documents, such as job descriptions and employment contracts

Information that is sometimes shared with buyers:

  • Pricing with specific customers or clients
  • Customer contracts – names are redacted
  • Employee names, agreements, and other information
  • List of suppliers

Information that is not regularly shared with buyers:

  • Software code
  • Customer names – current and prospective
  • Trade secrets

Uncooperative Buyers

The sales process is long and arduous. Finding a flexible and realistic buyer who is easy to work with is just as important as finding someone who will pay your price. Let’s go through some examples of problematic buyers and how you should respond to them:

Buyers Who Refuse To Be Screened

Most deals with buyers who refuse to be screened, uncooperative buyers, or worse yet a “buyer from hell” end up falling apart. These types of buyers will try to bargain for much more than they initially agreed on, threaten lawsuits, threaten to leak word of the sale to competitors, and more. Don’t waste your time with them, plain and simple. Find someone who is easier to work with and who is cooperative enough to get a deal done. Remember, all transactions require cooperation from both the buyer and seller. If you encounter a buyer who seems exceptionally rigid in their strategy, you should move on.

Refusing to provide information is a red flag. Don’t waste your time with buyers that refuse to provide financial information on themselves. The majority of the time, it isn’t advisable to provide information to any buyer who refuses to provide any information about themselves. Even if they are qualified, refusing to complete a simple form makes them uncooperative, and it’s difficult to progress with the transaction with uncooperative buyers.

Buyers Who Don’t Respond 

How many times should you follow up? You shouldn’t have to chase down a buyer. I recommend following up a maximum of two or three times. A buyer must be sufficiently motivated to go through the process and has plenty of opportunities to change their mind, so don’t go running after them. If you have to chase a buyer or “push” them through the sales process, it’s unlikely they will follow through to closing the sale.

Verifying Information on the NDA

Should you verify the information on the NDA? No. Based on my experience, a small number of buyers provide inaccurate information, so verifying each buyer’s information is impractical and will likely scare buyers away this early in the process. Few buyers lie on their financial statement, especially when you ask them to sign the document. When an offer is made, you may ask to see source documents such as bank statements. Buyers know that their representations are verified in the process, and few will falsify this information.

The screening process involves releasing information to the buyer in phases. This means that as you release more information to the buyer about your business, you will also request information from the buyer, which will provide you with an opportunity to verify their information.

If the buyer claims to have an investor, ensure the investor is also pre-screened since they will have access to confidential information on your business. The investor should sign the NDA and also fill out the qualification forms.

What Happens After the NDA is Signed

The sequencing of events in any deal is important. Here are some common questions and my tips for what to do after an NDA has been signed.

Should you send the CIM after they sign the NDA? 

I recommend sending the CIM to buyers as soon as they sign the NDA. Buyers expect to see this immediately after signing the NDA and will often ignore your emails if they don’t immediately receive a professionally prepared package about your company right off the bat. 

How long does it take to close once a buyer is found? 

It takes two to four months to close, on average, once an LOI is accepted. I have closed some transactions in as little as one month, yet others have taken more than six months. It generally takes one to two months for due diligence and another one to two months to close once due diligence has been completed. The process can take longer if third-party financing is involved or if complications arise during the process.

What’s your number one rule for dealing with buyers? 

Run your business as if you’re never going to sell it. Never get hung up on one buyer. It’s easy to get wrapped up with one buyer so much that you lose focus on the business, and revenue begins to slide. Invest your time in a buyer, but not on your emotions. Spend time with the buyer, give them what they need, treat them with respect while staying focused on running your business until the closing.


There’s an adage in journalism that holds, “If your mother says she loves you, check it out.” The idea behind this dictum is to caution reporters to always confirm the facts. 

The same principle holds true when it comes to dealing with prospective buyers of your business. A buyer might tell you they’re financially qualified to take over your company, but are they really? A buyer might try to convince you they have the necessary tolerance for risk to take on your business, but how do you know for sure? 

This section will address in detail the questions that are central to determining your suitor’s financial wherewithal, their sincerity, their motivations, and more, to wit:

  • When to screen individual buyers
  • How to screen an individual buyer’s financial qualifications
  • How to screen a buyer’s motivation level
  • Screening first-time business owners versus previous business owners
  • Screening a buyer’s tolerance for risk
  • Understanding a buyer’s expectations to make sure they are realistic
  • Does it matter how long the buyer has been in the market

Here’s the scoop on getting the scoop on your buyer … 

Screen Individual Buyers Before Evaluating an Offer

Is a $2 million offer good or bad? 

If it’s from a buyer with a net worth of only $100,000 who has been convicted of multiple felonies and has just recently declared bankruptcy, it’s likely a waste of time negotiating with this buyer. On the other hand, if you have an all-cash offer from a serial entrepreneur who has an 800 FICO score and a related background, perhaps it’s worth pursuing.

It’s critical to screen individual buyers financially to ensure they have the wherewithal to complete the transaction before commiting your energy and time to negotiations.

Financially Screen Individual Buyers 

Many buyers are unrealistic regarding how much money is required to buy a business. Most are undercapitalized. As a result, many stay in the market for a long time because they don’t have enough liquid cash to buy a business. 

Also, many of these undercapitalized buyers make offers on businesses that are contingent on bank financing, and most of these deals are turned down by banks, often months later. As a result, it’s critical to screen individual buyers financially to ensure they have the wherewithal to complete the transaction before you commit your energy and time to negotiate with these buyers.

Screen Individual Buyers’ Motivation Levels

Some buyers are working at their day jobs and are secretly looking for a business during their work hours. They have no choice but to correspond through email. Other buyers prefer talking to someone on the phone about the business.

If the buyer is local, then politely request they meet you at your business, so you can give them a tour and answer their questions. This process weeds out buyers who sit at home and dream about buying a business. It is a give-and-take process, so give the buyer detailed information, then request that they spend time to meet you.

Treat First-Time Buyers and Serial Entrepreneurs Differently

First-time buyers are great buyers if and when they decide to pull the trigger. However, assessing their tolerance for risk is difficult. 

Buyers who have previously owned a business are accustomed to making decisions based on incomplete information and are more likely to make an offer on a business. Previous business owners are also aware that there is no perfect business. 

On the other hand, those who haven’t owned a business often don’t understand what it means to be a business owner and are not accustomed to making decisions based on a “gut feeling” or a lack of complete information. They also may be more averse to risk than those who have owned a business.

Screen First-Time Buyers’ Tolerance for Risk

Screening a first-time buyer’s tolerance for risk is difficult, but not impossible. A highly motivated buyer has the strength and commitment to overcome their fears and will develop the courage to make an offer. Buying any business is accompanied by some degree of risk and therefore fear, and it’s critical that a buyer is able to face their fears. 

Have you met with a buyer five or six times and they are requesting even more information about your business? The most effective method to assess this buyer’s tolerance for risk and ability to face their fears is to ask the buyer to make an offer. Those willing to take the plunge will make the offer. Risk-averse buyers will be overcome by fear and disappear. A buyer must face this fear directly if they are ever going to buy a business.

Avoid Buyers Looking for the Perfect Business

Beware of the buyer whose goal is to buy the “perfect” business and eliminate all forms of risk. This buyer will never buy a business. 

This type of buyer is easy to spot but difficult to describe. You’ll know ‘em when you see ‘em. They have been in the market for a business for three years and have looked at over 100 companies for sale and will bring a clipboard to your meeting with them. They will initially seem extremely interested in your business and will request meeting after meeting only to find out, at the eleventh hour, that your business isn’t “perfect.”

Challenge the buyer and educate them that there is no perfect business. Explain to the buyer that you thought the exact same thing before you started or bought your business. 

Talk openly about the buyer’s fear. Empathize with the buyer and challenge them to pull the trigger. Don’t meet with the buyer more than three or four times unless they make an offer on your business, which is the ultimate test.

Avoid Buyers Who Have Been Looking Too Long

Buyers should be able to identify a business and make an offer within 6 to 12 months. They should be able to close on a business within 12 months of starting the process. If the buyer has been in the market for over a year, you may have problems. Occasionally, we see buyers who have been in the market for one to two years. One to two years is a coin toss. A buyer who has been in the market for over two years is a red flag and should be avoided.

Handling an Unqualified Buyer

You have a buyer who is interested in your business but doesn’t seem to have enough cash. What should you do? Someone has approached you, and they are interested in your business, but the deal looks a little skinny. It doesn’t appear as if the buyer has enough liquidity to purchase your company. What are your options?

Let’s discuss the three general options you have:

  1. SBA Financing: I recommend getting your business pre-approved for an SBA loan. Yes, that means “your business” – and not the buyer – is pre-approved for a loan. The most popular loan for purchasing a business is the 7(a) loan. This loan requires a 20% down payment. However, if you structure the sale properly, you can reduce this requirement to 10%. This requires that you take action. Once your business has been pre-approved, you may also have the buyer pre-approved as well. However, don’t reverse these steps.
  2. Net Worth: Alternatively, the buyer may be able to access the equity in their other assets, such as equity in their home or their retirement account. I recommend going back to the buyer and simply asking them if they can liquidate any assets and provide a larger down payment.
  3. Investors: Friends, family, and fools. A last resort for the buyer is to seek money from investors. Note that this is commonly used by foreign investors, but this approach is not commonly used by U.S.-born citizens. If the buyer claims to have potential investors, I recommend communicating with them directly. Investors will not make an investment without seeing information on your business, so they should also sign your non-disclosure agreement.

There is also a fourth option: Offer more seller financing. I assume, however, that you would explore the three options above before offering additional seller financing. 

Preparing your business for sale will help you respond to the issues that will come up with interested buyers. Knowing your options for financing can keep the lines of communication open between you and a potential buyer.


Keeping the details of your business secure and confidential is critical at any time, especially when a competitor approaches you. 

This section explores the following strategies you can employ to protect yourself when selling your business to a competitor:

  • Contact buyers based on increasing stages of risk
  • Thoroughly screen buyers
  • Know what to release and when
  • Release information in phases
  • Mark or stamp documents “confidential”
  • Appoint a neutral third party to facilitate due diligence
  • Prepare a custom or buyer-specific non-disclosure agreement (NDA)

Contact Buyers Based on Increasing Stages of Risk

First, contact buyers that represent the lowest risk to you and your company. Typically, this involves initially contacting private equity firms and indirect competitors. 

Dealing with these buyers represents the lowest level of risk to your business. This is the de facto standard in most private auctions if you hire an M&A advisor to represent you.

This strategy of first contacting low-risk buyers lets you polish your presentation and positioning before contacting higher priority or higher-risk buyers, such as competitors. The first buyers you contact will inevitably point out potential drawbacks, deal-breakers, or other weaknesses they may see in your business. No matter how much prep work you do, there will always be small details you miss in getting your company ready for sale. 

Your experience with first contacting the low-risk, low-priority group of buyers will help you hone your first impressions with the high-priority buyers. Such a strategy always yields useful feedback that can be used to tighten up future buyer presentations and increases the chance of a smoother transaction.

At Morgan & Westfield, we recently sold a large commercial cleaning company, and this is the strategy we used. We initially contacted a few dozen out-of-state competitors who could benefit from expanding their geographic reach. We considered these competitors low-risk since they weren’t directly engaged in the business’s geographic market. In another instance, we employed a similar strategy to sell a large landscaping company, but in this scenario, we contacted indirect competitors in the geographic market. We considered this lower risk as the companies were ideal acquisition candidates, but they were not direct competitors. Our strategy was to contact direct competitors only as a last resort. In both of these cases, we started with low-risk potential buyers and were able to sharpen our approach until we found the right buyers for each business.

Keeping the details of your business secure and confidential is critical at every stage.

Thoroughly Screen Buyers

Thoroughly qualify the buyer before releasing information. It’s important to ensure the buyer is qualified before you share confidential information. You can get more detailed in your requests as due diligence progresses. 

We ask interested parties, including competitors, to complete a “Buyer Package” that asks dozens of questions relating to their financial position and any past acquisitions they made. We do this before we release any information to them regarding a business. If the buyer refuses to answer these questions, we don’t provide them any additional information about the business.

If the buyer demands to talk to customers in the latter stages of due diligence, you can respond that you would like to talk to some of their key employees, owners of past companies they have acquired, or other contacts.

Consider hiring a private investigator to perform a few searches on the buyer or the company, depending on the sensitivity of the information you are sharing. An experienced P.I. is resourceful, with access to databases and other resources, and may be able to quickly identify someone with a less-than-pristine reputation. 

Ask your attorney to search public records to discover how many times they have been involved in litigation, if at all. 

Checking a potential buyer’s credit – either business or personal – may also be wise. 

Obtaining detailed financial information to verify the buyer’s ability to complete the transaction is a good idea if you have any doubts regarding the buyer’s financial ability. Go with your gut. If you have doubts regarding specific areas, dig into these areas. For example, if the buyer makes questionable claims regarding several of their past acquisitions, ask to speak with the owner of a company they acquired. This request is certainly within your rights, especially if the buyer is asking for highly sensitive information.

Know What to Release and When

Only release general information in the early stages of any conversation with a potential buyer. Withhold sensitive information – or any other form of information that a competitor could use against you – until the latter stages of the transaction.

Release Information in Phases

Release information to the buyer in phases, as the buyer demonstrates continued interest in your business. In this manner, you release more sensitive information as you gain the knowledge and trust of the buyer. 

For example, you should release highly confidential information, such as customer contracts, only at the later stages of due diligence. Only release sensitive information later in the process, or not at all.

Impose deadlines on the buyer. In some cases, you can break due diligence into stages and ask that the buyer sign off on the completion of each stage. 

For example, you can allow the buyer to perform financial due diligence first. Once they have done so, you can request that they sign off on the satisfactory completion of that stage before moving to the next phase of due diligence. 

While this strategy might be possible for some businesses, it’s impractical in most acquisitions due to the iterative nature of due diligence. A more straightforward solution is to simply withhold sensitive information until the later stages of due diligence.

Release highly confidential information only at the later stages of due diligence.

Mark or Stamp Documents ‘Confidential’

Stamp or watermark all documents “Confidential” before releasing them to the buyer. While this is not a requirement of most NDAs, it is a good practice and clearly communicates to the buyer the confidential nature of any information you share with them.

Appoint a Third Party to Facilitate Due Diligence

Appoint a neutral third party to perform due diligence on behalf of the buyer. In these cases, the third party would only serve to perform due diligence – they would not pass on any of the confidential information to the buyer.

For example, if you own a software company, you and the buyer could jointly hire a third party to perform a code audit. The third party would be the only contact to have access to your software code. After they complete their code audit, they would prepare a report and present it to the buyer for analysis, limiting the number of contacts with access to your confidential software code.

A second scenario may be one in which your business has high customer concentration, and the buyer is concerned about retaining your top three customers, who account for 70% of your revenue. In this case, a third party could be hired to perform customer surveys to ensure your top clients are satisfied. A transaction could also be structured to obscure the fact that the company was acquired. I recently employed this strategy to sell a large service firm in Chicago.

Jointly retain a third-party CPA firm to perform financial due diligence if you must share sensitive financial information with a buyer. 

There are always risks involved with sharing your sensitive business information during the sales process. But there are steps you can take to minimize that risk and still share the necessary information about your business with potential buyers.

Prepare a Custom or Buyer-Specific NDA

NDAs are more than a tool to keep your information confidential. While that is usually the explicit goal of an NDA, it isn’t the only one. A non-disclosure agreement has two primary goals beyond that.

Goal 1: Control Behavior

The primary goal of the NDA is to prevent confidentiality breaches from occurring in the first place. If the terms of the NDA are clear, this objective is likely to be achieved. Considering this objective, it’s often helpful in smaller transactions to reiterate the confidential nature of the transaction to the buyer during the initial phone conversation or meeting. 

It may be counter-effective to draft an NDA that is overly complex. Unfortunately, some buyers don’t thoroughly read the terms of the NDA and inappropriately assume that the language is all boilerplate. With this being the case, it helps to reiterate the key terms of the NDA if you believe the competitor has not completed many acquisitions before and may not possess this knowledge. 

If the buyer attempts to negotiate the language of the NDA, this can be a good sign. It can be a sign that the buyer closely monitors their commitments and intends to abide by them. Also, if the goal of the NDA is to control behavior, then it goes without saying that the language should be clear, concise, and devoid of legalese.

Goal 2: Offer a Mechanism for Litigation

If an NDA is violated, your primary option in most cases is to litigate. While you can deliberate for hours regarding the definition of confidential information, this won’t matter if the buyer doesn’t understand the nuances of the language contained within the NDA. With that being said, we believe the primary goal of an NDA is to control and prevent undesirable behavior. If the first objective to “control behavior” is achieved, litigation isn’t necessary. If controlling behavior is the goal, then the language of the NDA should be clear and understandable. 

Now that I have explained the purpose of the NDA, let me offer several tips on how to strengthen the NDA when dealing with direct competitors.

Prepare a Buyer-Specific NDA

Have your attorney prepare an NDA that is specific to the buyer you are 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 prepare an NDA for that specific buyer. 

Prepare a Separate NDA for Different Information

Separate NDAs can be prepared for different categories of confidential information, with different language necessary for different scenarios. 

For example, each of these scenarios may require a different set of legal strategies and language to protect you – the buyer meets with key employees vs. if the buyer meets with key customers vs. if you share proprietary pricing with the buyer.

Customize the NDA

An NDA often has to be customized for certain types of buyers. 

For example, we handle a wealthy private individual differently than we handle a direct competitor. We also manage private equity groups differently from competitors. 

Our process is more stringent with competitors since these transactions represent more risk to the seller. The protection a non-disclosure agreement offers varies based on the language contained within the NDA. In middle-market transactions, the NDA is negotiated with many buyers, especially if the buyer is a potential competitor.

To determine which topics to handle differently in an NDA with a competitor, consider the following questions:

  • Is information that is communicated orally included? 
  • Is “derived information” included?
  • Is the fact that your business is for sale considered confidential information?
  • What is the definition of “representatives”?
  • What is 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. See tips below for when to introduce this language.
  • No-Hire: The buyer agrees not to hire your employees, as opposed to not soliciting them.

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, then 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. 

Have the Buyer Sign Multiple NDAs

Ask the buyer to sign a different NDA at different 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 the buyer meet with your employees during due diligence. 

It may be necessary for your attorney 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 want 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.

Clauses to Consider Modifying

Now that I’ve offered several tips, let’s discuss the specific language contained within the NDA.

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 are 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. I don’t recommend this. The NDA should require that the buyer obtain the seller’s consent before releasing the confidential information to third parties, including their representatives. The agreement should also define what a representative is.

Permitted Uses: The NDA should state that the confidential information can be used only for purposes of evaluating the transaction and for no other purpose.

Disclosures Required by Law: Most NDAs allow the buyer to release confidential information if compelled to do so by law. NDAs with strongly worded language on behalf of the seller allow the seller to mediate these claims and otherwise offer the seller several protective mechanisms before the information is released.

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 a non-disclosure that addresses non-solicitation of your employees before you allow the buyer to meet with your employees.

Non-Solicitation of Customers, Employees, and Suppliers: This is also a hotly debated section and 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 to not actively pursue your employees, but that your employees can be hired if they apply through general employment advertisements.

No Obligation to Proceed: The NDA should state that the parties have no obligation to proceed and that the parties do not intend to create a binding commitment.

Disclaimer Regarding Accuracy: To protect the seller, the NDA should state that you aren’t making any warranties regarding the accuracy of the information.

Term: All NDAs should include a 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.

Assignment: Most NDAs are not assignable, and the NDA should clearly state whether or not it is assignable.

Key Points

If you’re contacted by a competitor, I recommend the following:

  • Contact buyers based on increasing stages of risk.
  • Ask your attorney to prepare a custom or buyer-specific NDA.
  • Thoroughly screen the buyer.
  • Release information to the competitor in stages or phases.
  • Stamp documents “confidential.”
  • Appoint a neutral third party to facilitate due diligence.
  • Ask your attorney to prepare a specific non-disclosure agreement for your competitor.
  • Ensure the buyer’s representatives also sign a non-disclosure agreement.
  • Ask the buyer to sign additional non-disclosure agreements as the transaction progresses.