Why You Need an NDA When Selling Your Business
by Paul Ruden
It would be unwise to discuss any confidential business information about your business to a prospective buyer without first obtaining a signed non-disclosure agreement. Photo: Shutterstock.com.
Earlier this month, Travel Market Report published an interesting piece by Editor Daniel McCarthy entitled, “What Advisors Need to Know About Selling their Travel Agency.” The article reports some important advice from Robert Sweeney, of Innovative Travel Acquisitions, an Atlanta-based travel business brokerage firm. I was particularly struck by two comments at the end of the article.
The first is, “The ideal situation … is to have two serious conversations with buyers going on simultaneously, if you’re thinking about selling.” Having “competition” in the discussion can be extremely valuable to the seller, even if the two potential buyers are unaware of each other. Their questions, arguments about value and other points of sale can educate the seller in ways that might not occur when the conversation is with only one buyer at a time.
That brings me to the second and final observation from Mr. Sweeney: “… maybe most important for potential sellers to know, is that confidentiality is king. “A business that is not known to be for sale is worth more than one that is known to be for sale.”
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Confidentiality in the sense conveyed by Mr. Sweeney’s comment is no doubt useful, but I want to add a broader point for consideration by every potential seller: Never, ever, disclose any confidential business information about your agency to a prospective buyer without first obtaining a signed non-disclosure agreement, for which the recognized acronym is NDA.
Never, ever.
That principle applies even if you’re preparing to negotiate with your best friend, a relative and, of course, most especially when dealing with a stranger. No matter what you think you know or may have heard about a prospective purchaser, you simply cannot fully understand his motives and goals.
Disclosing confidential financial or client information can, for example, be used by a competitor against your business without restraint. Similarly, if there is no NDA in force, the information can be provided to others without limit. If you wouldn’t give such a person the password for your bank account, you should not reveal the keys to your business without protection.
A serious and professional buyer should expect you to ask for an NDA. An NDA is essential to protect your confidential business information when dealing with a prospective purchaser and should be in place, fully executed, before any information is provided orally or in writing. You can explain that the NDA actually protects both parties by specifying what types of information about your business are considered confidential. The NDA needs to be specific to your business and should be prepared, or at least reviewed, by your attorney to be sure all of the key elements are covered.
Accept no excuses, like, “We’re just talking right now,” “We’re just in the exploratory phase,” or “I’m put off that you don’t trust me.” You can respond with, “I believe in the old Russian proverb that says, ‘Trust but verify.’” If the prospective buyer balks at signing an NDA, thank her for her interest and walk away.
