The Real Story Behind NDAs in Transactions

Mike Ginsberg

I read a blog last week that really struck a chord with me.  It was titled “Why Most VCs Don’t Sign NDAs” (to read the post, click here). And while it’s an older article, it still has great relevance to deals today.

To summarize, the author states why an entrepreneur should never ask a venture capitalist (VC) to sign a non-disclosure agreement.  His premise is that VCs won’t because they may be looking at funding similar deals and won’t expose themselves to legal issues raised by overzealous entrepreneurs who think VCs are out to steal their ideas.  “If you even ask them to sign one, you might as well tattoo ‘I’m clueless!’ on your forehead,” he states.  The blog goes on from that premise, but you get the picture.

I decided to tie this to the realities that an owner of service business will face when he/she decides to sell a business and confronts a prospective buyer about signing an NDA.  This is not intended to be an all-inclusive list, and you should always consult a professional adviser before signing anything.

1. Experienced business buyers have different DNA than venture capitalists.  A buyer expects to sign an NDA.  They expect you to ask them to do so and will tag you as “clueless” if you don’t ask them to do so.
2. Experienced buyers will require a finite timeframe for all NDAs they execute.  They will not let any aspect of an NDA go on in perpetuity.  The reason is simply they will not tie up their company or limited partners to a potential breach of confidentiality years down the road.  Legitimate buyers are not intending to breach confidentiality and they are not trying to insult you.  They simply have fiduciary responsibilities to their shareholders.  It is ok to have a realistic timeframe.  Expect 1 to 2 years.
3. Expect that large corporate buyers and publicly traded companies will try to get you to sign their NDA and not want to execute yours.  Don’t take offense to this.  Expect it.  Either hold firm that they need to execute yours and run the risk of losing them as a prospective buyer or be flexible and make modifications to their template.
4. Your NDA should be appropriately restrictive in areas that are most important to your particular type of business, such as the definition of confidential information.  A good litmus test is if you ask yourself if you were the buyer would you define that information as confidential.
5. Don’t try to restrict the buyer from running their own business or make similar investments because they won’t allow themselves to be restricted.  For example, you can restrict them from soliciting your employees that they come in contact with during the sale process for a reasonable period of time.  You cannot restrict them forever and you cannot prevent them from hiring someone who responds to a job post (even if it is the same person that you met during the same process).
6. Expect that the buyer will bring in other experienced professionals to review your information, conduct due diligence, and interview your clients and staff.  They may not be expert in the industry that you service.  Make sure the NDA restricts all parties that the buyer brings in including their advisors and other affiliates.

No, I am not an attorney and I don’t play one on TV.  However, after 20 years advising business owners on the sale of their business, I have enough scars and battle wounds from attorneys on both ends of a transaction to know what to reasonably expect to see in a NDA.  Happy to discuss.

Mike Ginsberg is President and CEO of ARM advisory firm Kaulkin Ginsberg, and can be reached by email. The firm is celebrating its 20-year anniversary in the ARM market.