Keeping it Simple
Thanks for stopping by. Keeping it Simple are a series of blogs designed to provide business owners & buyers with business selling insight.
The importance of an NDA
Most business owners invest an incredible amount of time, effort, and money in operating a business.
When interested buyers inquire about the possibility of purchasing a business, it is critical for the owner of the business not to provide any confidential information to a prospective purchaser until that party has signed a well-written business sale non-disclosure agreement (also known as the NDA).
It is equally important for business owners to ensure that employees and third parties who are connected with the business are prohibited from improperly using or disclosing any confidential or proprietary information of the business (e.g. customer lists, trade secrets, and financial statements).
When selling a business NDA’s should be the first line of defense to protect one of the most valuable assets of a business — proprietary information.
There are many types of Non-Disclosure agreements. Today we look at the use of a business owner’s non-disclosure agreement in connection with selling a business.
Without a signed NDA, a potential buyer of a business (the receiving party) has no legal obligation to refrain from using or disclosing the valuable proprietary information of that business. Without an NDA in place, a potential buyer can use confidential information in a competing business or share that information with competitors and others.
The NDA needs to outline the many different types of confidential information of a business it is protecting. It should include all information or data of a business, including oral, electronic media and print that is disclosed by a potential seller to a potential buyer on or after the date the parties sign the confidentiality agreement.
When selling a business, the non-disclosure agreement will not protect information that a seller provides to a potential buyer before the date the confidentiality agreement is signed. It is therefore important for a seller to have a signed confidentiality agreement in place before they provide any information to a potential buyer.
Below are some of the information, focus, and timing business sellers may want to consider when providing confidential information.
- Business plans, summaries regarding the company, including analyses that contain both technical and non-technical information.
- Trade secrets, proprietary information, ideas, know-how, processes, operating procedures, and instructions.
- Computer or software programs.
- Contracts (whether drafts or executed), financial records, accounting records, financial statements, forecasts, projections, budgets, and business, strategic or marketing plans;
- Prospective or current client and customer lists, vendor information, and details on business relationships.
- Pricing, cost or profit figures, sources of supplies, and pricing methods
- Information regarding staff, real estate, equipment, and other tangible and intangible assets of the business.
These are a few of the items that business owners should consider when creating an NDA. Each business is different, and each has different information to protect. Working with an experienced lawyer will not only help to ensure that a business owner has protected themselves from confidential information regarding their business becoming public knowledge but also provides a form of recourse in case a buyer does not respect the terms of the NDA.
Providing any confidential information without an NDA in place is extremely risky for the seller, and in such cases, the seller should only initially disclose to the buyer such information that truly is not confidential in nature.
A well thought out NDA should be crafted “prior” to the business being marketed for sale.
“Keeping it Simple” provides weekly insight designed to help business owners understand the journey of selling a business.
Due Diligence
-reasonable steps taken by a person to satisfy a legal requirement, especially in buying or selling something. -a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
In the world of business buying & selling in plain English, due diligence means doing your homework.
Unfortunately, it is not uncommon for me to hear from a business owner who did not do their homework leading up to the purchase of a business and now are needing my help to try and sell a business that has not done so well under their guidance.
There are many areas new business buyers may want to focus on before finalizing a business sale.
Some of which are:
Ego. I am taken back when speaking with potential business buyers on how once they purchase a business, the significant changes to the dynamics of the business operation they are going to make. Many go as far as thinking they are much better equipped in running the business than the people who they are purchasing the business from.
Skillset. Many business buyers overestimate their overall importance to success of the company they are/were currently employed at. You may be the best marketer in the world, but if you have limited experience in bookkeeping, protocol’s, administrative duties, handling of employees and dealing directly with client’s, chances are good that your business will suffer.
The overall health of the business aside from the financials.
Mentorship. During and up to the completion of a business sale, much of a buyer’s time is spent away from the business meeting landlords, bankers, and setting up licensing etc., leaving little time for actual training. New business buyers should spend more time during the due diligence process learning about the business’s history, the challenges (and solutions) the current business experienced during business ownership, and their philosophies behind the operations of the business itself.
As one recent client told me. My bank and I knew everything about the financials and the assets of the business that I was buying. But honestly, I knew little about the business itself the day I put the key in the door as the new owner. If I had to do it over all over again, I would put a lot more effort and energy into learning how to run the business and less into the financials. The financials gave me insight into historically how the business performed under the old ownership but did little in helping me with the continued success of the business moving forward..