The M&A NDA (Non-Disclosure Agreement) | A Complete Guide

Executive Summary

Who Will Find This Article Helpful

• Any business owners about to put their business on the market.
• Any business owners looking to sell their business to direct competitors.
• Any professional advisor, such as an accountant or attorney, who would like to better understand both the role of confidentiality agreements in the sales process and the detailed mechanics of negotiating an NDA.

Why is an NDA Is Important

The non-disclosure agreement (NDA) is the first document to be signed in a transaction and sets the tone for negotiations. It’s tempting to assume that all NDAs are the same, but any mistakes in negotiating and signing one can close off critical options later in the process. 

A properly drafted confidentiality agreement (CA) sets expectations and signals to buyers that you’re well-represented. This means buyers are less likely to use negotiating tactics they’d try with unsophisticated, poorly represented sellers. Signing an NDA also helps the buyer ensure the seller’s cooperation.

Remember, you will be signing a new NDA with each potential buyer of your business, and the information therein still applies to entities that do not complete the purchase.

The Process of Negotiating an NDA

1. Seller prepares and shares a teaser profile.
2. Buyer, and sometimes the seller, signs the NDA.
3. Seller shares the confidential information memorandum (CIM) with the buyer.

Drafting the NDA

• Templates: Most brokers use a seller-friendly template. If a buyer suggests using “a standard NDA,” make sure your attorney reviews any NDA they present to you.
• Custom NDAs: If your situation is unique, consult with your M&A attorney to draft a custom NDA that works for your business and context. 
• Revisions: Few buyers request changes to an NDA unless it contains highly restrictive language. Most buyers are also willing to negotiate their template.
• Parties: The seller’s M&A advisor usually prepares the first draft of an NDA. Private equity (PE) firms regularly sign NDAs, but many venture capitalists don’t. Your licensed professional advisors don’t need to sign an NDA due to their implied duties.

Introduction

One of the key components of selling your business is keeping the sale a secret. To do this, you’ll need a well-drafted non-disclosure agreement (NDA). 

Often referred to as a confidentiality agreement (CA), the NDA is the first document signed in a transaction. In addition to protecting your business information, having an NDA sets the tone for the negotiation and signals to buyers that you’re well-represented. 

It’s tempting to assume that all NDAs are the same, but any mistakes or oversights at the negotiating and signing phase can close off critical options later in the M&A process. This article explores key NDA clauses and offers strategies you can use before and during the sale to keep your information safe. 

What the NDA Covers in an M&A Transaction

At a minimum, an NDA will usually cover the following:

• The definition of “confidential information”
• Restrictions in using this confidential information
• Obligations of the recipient (i.e., the buyer)
• Standards of care
• Terms of the NDA
• Remedies
• Permitted disclosures
• Return of confidential information
• Disclosure period
• No obligation to proceed
• No granting of IP rights
• Enforcement
• Law and jurisdiction
• Dispute resolution

Concerning the confidential information, the buyer is obligated to:

• Use the information only for purposes described in the agreement.
• Only disclose the information to people who need to know details for evaluating the transaction.
• Use appropriate or reasonable efforts to keep the information secure.
• Ensure that anyone to whom the information is disclosed further abides by obligations restricting use and disclosure, and ensure that security is at least as protective as the NDA.
• Not share the information with third parties, unless required to by law, for a minimum period of time, typically one to five years.
• Safeguard the information they receive with reasonable precautions that are at least as stringent as the safeguards they use to protect their own information.
• Not reverse-engineer or decompile the information.
• Notify the disclosing party of any leaks of the disclosed information.
• Comply with all government rules and regulations, including export and import laws.
• Cease the use of the information and return it to the disclosing party upon termination of the NDA.

The Importance of a Properly Drafted NDA

Not all NDAs are alike, and their finer points shouldn’t be taken for granted. A seemingly small mistake while negotiating and signing an NDA can close off critical options later in the process, such as having the NDA expire after six months or missing a clause that prevents solicitation of your employees. In some cases, a breach of confidentiality can destroy your business. 

As the seller, you have leverage while negotiating the NDA, but if you find a problem afterward, you have no power to change it. 

NDAs Address Other Critical Issues

The language in M&A confidentiality agreements has evolved over the years and is no longer restricted to matters of confidentiality. Despite the implication of the name, confidentiality agreements address many additional critical issues, such as the non-solicitation of employees and other sales process matters. 

NDAs Set Expectations

A properly drafted CA sets expectations with buyers, which is critical to the M&A process. A properly prepared agreement signals to buyers that you’re well-represented, and buyers will be less likely to use negotiating tactics they might try on unprepared, less sophisticated sellers.

Negotiating an NDA for M&A

Step 1 – Prepare and Send the Teaser Profile

For transactions in the middle market, most intermediaries provide a teaser profile to a prospective buyer before requesting they sign an NDA. Most middle-market buyers prefer to see if the business is a good fit before committing to the terms and obligations of an NDA.

Step 2 – Ensure the NDA Is Signed

The teaser profile and NDA are often contained in the same document, and the buyer is asked to sign the NDA if they’d like to access the business’s confidential information memorandum (CIM). This means that the NDA is usually signed early in most M&A transactions.

Step 3 – Prepare and Share the CIM

The CIM is sent to buyers after they sign the NDA.

When To Execute a Confidentiality Agreement or NDA for M&A

Disclosing Information vs. Preserving Confidentiality

The goal of the intermediary representing the seller is to protect their client’s sensitive and confidential information while providing enough information to a potential buyer so they can decide whether or not to pursue the business. Needless to say, this is a delicate balancing act. 

When the NDA Is Signed

The NDA is the first document to be signed in a transaction and sets the tone for negotiations. It’s a key component early in the sales process. Depending on the type of business for sale, the name and location of the business can be highly sensitive. A seller may want to protect that information until they know the buyer is genuine.

Interested buyers are asked to sign the NDA early in the process. They can then see the seller’s confidential information memorandum (CIM) with specific details about the business.

If the business is being sold through a broker or M&A intermediary, the NDA will usually be executed before the business’s name is disclosed. If the owner has been approached by a competitor directly, then an NDA is often signed before substantive discussions take place or before the seller shares confidential information with the buyer.

Drafting the NDA

Template NDAs

If an investment banker or M&A advisor represents you, expect them to have a template. Because most M&A advisors represent sellers, their template will be seller-friendly. 

Custom NDAs

If your situation is unique, consult with your M&A attorney to draft a custom NDA. 

Frequency of Revisions

In most cases, buyers will make few requests about the language contained in your NDA. You should be prepared to negotiate the terms of the agreement, just in case.

Who Drafts the NDA

In practice, most NDAs in M&A transactions are drafted by the disclosing party, usually the seller. Sellers negotiate with multiple buyers, and maintaining consistent language across the agreements simplifies the process. Most NDAs never make it past the first stage of selling a business (i.e., signing an NDA and reviewing the offering memorandum), and you may execute dozens of NDAs with potential buyers during the sale.

How NDAs Benefit the Buyer

Many buyers view an NDA as one-sided and solely benefiting the seller. However, the buyer also benefits from many of the protections the NDA affords. 

Protects the Ultimate Buyer

Potential buyers who didn’t end up purchasing the business, but who may be a competitor, were bound by the NDA before accessing confidential company information. This means that even though competitors may know some of the inner workings of the business, the new owner’s information is still protected.

Protects Customer Relationships

The fact that a business is for sale may cause certain customers to reconsider their relationship with the company. An NDA helps prevent this by keeping the sale under wraps.

Encourages Seller Cooperation

By signing the NDA, the buyer is letting the seller know they’re serious about buying a business. A seller is unlikely to share highly sensitive and critical information about their company beforehand, and most refuse further discussions with a buyer who’s unwilling to sign. Sellers become cooperative in direct relation to potential buyers’ cooperation.

You might execute dozens of NDAs to different potential buyers. Maintaining consistent language across agreements simplifies the process.

Who is Bound by NDAs in M&A

There are two main types of NDAs in an M&A deal, each binding different parties. A unilateral NDA may be binding only to the party receiving the information, while a mutual NDA may be binding for all parties that sign. Most NDAs don’t clearly state whether they’re unilateral or mutual, but this can be discerned by briefly reading the contract.

• Unilateral: In a unilateral (or one-way) agreement, only one party is obligated to keep confidential information secret. Most M&A NDAs are unilateral, wherein the buyer is the recipient and the seller is the disclosing party, and the seller is not bound by the NDA.
• Mutual: In a mutual (or bilateral) agreement, both parties provide information that is intended to remain secret. This type of agreement is common when businesses are considering some form of a joint venture or merger.

Differences in M&A Buyer Types

Private Equity Firms

As a matter of custom, nearly all private equity firms will agree to sign a non-disclosure agreement.

Venture Capital Firms

Venture capitalists (VCs) will rarely agree to sign an NDA. VCs are financial buyers investing in speculative opportunities. Due to the volume of transactions they pursue, they’d be unable to track, monitor, or enforce such a vast number of NDAs. Entering into an NDA also increases their risk of facing charges of trade secret misappropriation if they independently develop similar information or inadvertently disclose information. This is not to say a VC will never sign an NDA – they may be willing to sign at the due diligence stage, for example.

Common NDA Problems and Their Solutions

Here’s a summary of the most common NDA problems I encounter during the M&A process:

• Litigation Revealing Trade Secrets: Despite the importance of the NDA in maintaining trade-secret protection, there is a risk of litigation revealing confidential information in open court. Courts will typically protect the secrecy of information deemed to be “trade secrets,” but to qualify, the information must be kept secret, or any third parties pledged to secrecy. Signing an NDA serves as this pledge, and your trade secrets should be afforded the general protection of the courts.
• Premature Release of Critical Information: To minimize risks associated with highly sensitive information, such as customer lists, I recommend a phased release in which confidential and sensitive information is released in stages as the M&A process unfolds.
• Poorly Defined Confidential Information: Problems with CAs arise when the “confidential information” the agreement is intended to protect is defined so broadly that it’s practically impossible to determine what it covers and whether that information is truly deemed confidential.
• Incorrect Entity Names Used: Ensure that you include the correct legal names of individuals or companies in any agreement. Getting any details wrong could leave you on shaky ground if you have to enforce the agreement.
• Using Unnecessary NDAs: If you engage licensed professionals, such as accountants or attorneys, a confidentiality agreement isn’t always required as they have a duty of care once they accept you as a client. This means that confidentiality is implicit in their role, and a separate document specifying the need is not legally required.
• Poorly Enforced NDA Consequences: There are pragmatic issues related to the enforcement of NDAs – the seller may not always be aware of a confidentiality agreement breach. It’s wise to be on the lookout for potential breaches so you can quickly address them.

FAQs About NDAs

Is it common to negotiate confidentiality agreements?

Yes. The first draft is always negotiable, but the degree to which parties negotiate depends on their individual bargaining strength. Every buyer, whether corporate or financial, has their idiosyncrasies in terms of the language they look for in a CA, based on the history of their deals and what may have gone wrong in the past.

The first draft of an NDA is always negotiable, but the degree to which parties negotiate depends on their individual bargaining strength. 

In practice, a minority of buyers request changes to an NDA. But the later you request an NDA from a buyer, the more likely they will attempt to negotiate the terms. The earlier you request one, the more likely they’ll accept it without quibble.

What’s the role of my attorney and M&A advisor?

They’re there to guide you through the process and to represent your best interests in negotiations. Every M&A advisor will have an NDA template you can use. Your M&A attorney should become involved if you have unique needs, such as trade secrets that need to be protected, or if you’re particularly concerned about the buyer not soliciting your employees.

Who needs to sign the NDA?

First and foremost, the NDA must be signed by the seller and the buyer. To ensure the anonymity of your information, other signatories may include third-party services involved in the deal.

Should my professional advisors sign the NDA?

Most M&A advisors and investment bankers will sign an NDA, though some will view the request as naive since they have an implied duty of confidentiality, which makes it unnecessary in most cases.

Professionals such as PE firms, VCs, M&A advisors, and investment bankers wouldn’t be in business for long if they made a habit of stealing ideas. PE firms nearly always sign NDAs when scouting for acquisitions. VCs don’t. Attorneys and accountants will sometimes sign an NDA if the situation is unique, e.g., if they’re part-owners in a competitive firm.

Private equity firms nearly always sign NDAs when scouting for acquisitions. VCs do not. 

A buyer approached me to buy my company. Should I sign their “standard NDA”?

No. There’s no such thing as a “standard NDA.” Always have the NDA reviewed by your attorney before signing.

Are NDAs one-way or two-way agreements?

They can be either. Most commonly, NDAs are drafted to be one-way agreements in which the seller only attempts to restrict the buyer’s actions. Buyers often modify the NDA if they’re disclosing information such as financial records to the seller, or at least protecting the terms of the transaction so the seller can’t shop the buyer’s offer.

What’s signed after the NDA?

A letter of interest or letter of intent (LOI) is customarily signed after the parties have exchanged information and the buyer has expressed an interest in progressing to due diligence. After due diligence is completed, the parties then replace the LOI with a definitive agreement (i.e., purchase agreement, asset purchase agreement, definitive purchase agreement), which is signed at closing to consummate the deal.

Can the buyer disclose specific terms of the negotiation after the NDA expires?

Yes, unless the NDA specifically prohibits this. An alternative is to remove the expiration date altogether, though most buyers will argue that it may be difficult to monitor compliance with the agreement long-term. Some jurisdictions may also not allow a perpetual term.

Conclusion

The NDA is a pivotal agreement in the M&A process. Before it’s in place, you’re only speculating, but once it’s signed, you’ve begun a formal process and are heading pointedly toward serious negotiations. 

Whether you’re working with your M&A advisor’s template NDA or your attorney has built custom terms to match the nuances of your products and industry, your potential buyer is committing to your privacy and knows the consequences of a breach. 

With an NDA in hand, they’re one step closer to a letter of intent and to making an offer on your business.