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Selling a Business: Why You Need Non-Disclosure Agreement

When you have made up your mind to sell your business, one of the important steps to take is to protect your confidentiality and ensure that business secrets stay secret even when you may have exited the business.

A Non-Disclosure agreement is a document signed by parties to a contract in order to restrict third party access to information being shared amongst parties to the contract. When you want to sell your business, you should try to obtain a unilateral non-disclosure agreement from the buyer in order to prevent the buyer from divulging information you may have disclosed to him about your business to them during the process of negotiation and after the deal must have been closed. However, this agreement does not prevent the buyer from sharing information obtained from other sources. But why do you need a non-disclosure agreement when selling your business?

Selling a Business: Why You Need a Non-Disclosure Agreement

1. When you start the process of handing over your business to someone else to run, a lot of things could happen if information is not adequately protected. First, your existing customers and employees may begin to react negatively or withdraw from your business when they learn that the business is about to be handed over to a new management. Your staff may even start to resign or reduce their level of commitment.

As human beings, we are not always appreciative of change and once we smell a change coming, it may start to affect us unconsciously therefore, it’s always better to get potential buyers to sign non-disclosure agreements to prevent third parties from learning about a business sale before you are ready to disclose the information yourself.

2. Another reason why you need non-disclosure agreement when selling your business is that there may be some business secrets which you would like to remain within the business even when you may have handed the business over. Every business has its own success ingredient which may be unknown to others in the industry; a situation where another person takes over the business and starts to divulge these secrets to all who care to listen may be unacceptable to you especially if it is something you worked very hard and spent a lot of money to develop or discover.

3. It also helps to protect your business from competitors who may see it as an opportunity to leech on your business. Never underestimate your competitors especially if your business is doing better. A competitor who has no intentions to buy your business but is interested in learning some information about your business may get someone to act as a potential buyer knowing that you would be obligated under the law to provide necessary information to potential buyers.

4. Your customer’s information also needs to be protected even when you have handed over your business. This is especially important if you work in an industry why client confidentiality is taken very seriously. For instance, if you operate in the medical industry where your patient’s information needs to be kept secret, you would need to get the purchaser to sign a non-disclosure agreement so as to ensure privacy.

5. Potential buyers are also very careful about the amount of information that has been revealed about the business they are about to buy. No one wants to buy a business that has had its trade secrets revealed to the entire public. Just like you cherish your privacy, the person who takes over would also want privacy. It therefore becomes your duty to ensure that this privacy is maintained before, during and after the business sales.

These are just some of the reasons why you need a non-disclosure agreement when selling your business. However, a non-disclosure agreement is not sufficient to guarantee confidentiality when selling your business. To further protect your business information during a sale, you should take the following steps-:

How to Further Protect Yourself When Selling your Business

  • Advertise your sales discreetly-: Don’t reveal too much information about your business when you are advertising your business for sale. Instead of advertising your Business Name, you should use information that points to the nature and strength of your business. You should also avoid advertising your business address or any information that would make it easy for people to trace the advert to you. You could use an e-mail address created solely for the purpose. If you are using a business sales listing website, ensure that you go with a website that allows you to protect your business identity.
  • Screen all interested buyers before divulging information-: When you get letters of intent from interested buyers, ensure that you pre-qualify each one of them and reveal information only to those who pass the test. It’s not everyone who contacts you that would be qualified to make the purchase. In fact, according to experienced brokers, only about 10% of respondents would pre-qualify; so you see why revealing business information to all interested parties is not really worth it.
  • Request for a detailed letter of intent-: When you advertise your business for sales, you can make the pre-qualification process easier and sieve the wheat from the chaff by asking interested buyers to provide a detailed letter of intent specifying why they may be interested in buying the business, what experience they have to manage the business, their financial capability and other necessary information you would need in order to identify serious buyers.
  • Divulge information in stages-: You can also adopt a strategy that allows you to release information in stages and for each piece of information you release, there should be a corresponding evidence of interest and capability. For instance, before you release financial information about your business to a prospective buyer, you must ensure that the buyer is financially capable of buying the business.
  • Engage the services of a business broker-: Hiring a business broker can also help to guarantee privacy as the business broker would act as a middleman and handle all the pre-qualification stages such that your identity and business information is only released at a safe stage of the negotiation.

You can protect your business during a sale when you adopt these strategies but you have to know that you cannot keep such information from your employees forever. Therefore, it is advisable to plan for when you are going to inform your employees.