The Business Buyer’s Non-Disclosure Agreement

Non-Disclosure Agreement Protects Seller’s Confidentiality

Every South Florida business seller should be aware of how critical it is to have all potential buyers complete and sign a proper Non-Disclosure Agreement (NDA). The NDA is a legal instrument by which a potential buyer of a business qualifies themselves by affirming their ability to buy the business and by agreeing to keep the sale confidential while respecting the integrity of the deal and all parties concerned. In exchange for completing and signing the NDA, the business broker or intermediary will then give (if the potential buyer financially or otherwise qualifies) the potential buyer the confidential listing information about the business in question. It is critical that a business broker protects a sellers confidentiality by ensuring that no potential buyer receives the confidential listing information (including the name or specific location of the business) until the proper completion and signing of the NDA.

Seller’s Confidentiality Must Be Broadly Protected

Not all South Florida business brokers use the same NDA when qualifying potential buyers. Some are more narrow in scope than others. A sufficiently broad NDA requires a potential buyer to not disclose the confidential listing information to any employees of the business, suppliers or vendors to the business, competitors of the business, customers of the business, and the general public. Only with the seller’s consent may these confidentiality provisions be waived. Legal penalties are provided for in case the potential buyer signs an NDA and breaches the seller’s confidentiality.

Buyers Should Disclose Their Background in NDA

A proper NDA should have a provision whereby the potential buyer attests whether they are a member of a governmental agency (such as the Internal Revenue Service). If the potential buyer is associated with a business, then a proper NDA mandates that the potential buyer disclose this relationship and provide the contact information for the business.  This disclosure is particularly important when the potential buyer is a competitor of the seller and seeking a merger. If the potential buyer is acting individually, then they must submit a proper physical address, email address, and cell phone number.  Lastly, the confidentiality provisions apply to the buyer signing the NDA as well as any representatives or agents of the buyer. Of course, a proper NDA should have a business buyer attest to their available liquid funds, and if necessary, require extrinsic evidence thereof.

Intermediaries Should Have Potential Buyers Sign NDAs

The only way to ensure the confidentiality of a business sale is by having an intermediary – such as a professional business broker – handle the process of qualifying all potential buyers. If the business seller attempts to sell the business on their own, then there is an extremely high chance that the confidentiality of the sale will be breached. A typical potential buyer will have several interactions with whomever initially presents the business opportunity to them. This contact begins with the contact information provided by whomever is advertising the business. The potential buyer must eventually call, email, or correspond with the ‘contact person’ prior to even receiving an NDA to complete and sign. If this initial ‘point of contact’ person is the business seller himself or herself, then it is highly likely that the seller’s confidentiality will be breached.

Example of Buyer Signing NDA thru Business Seller

  • Bill the buyer is seeking to purchase a restaurant.
  • Susan the seller has placed an ad online attempting to sell her restaurant.
  • Susan’s business for sale advertisement does not include her name or the restaurant’s name, but it does include Susan’s cell phone number.
  • After all, Susan must provide some contact information so that a potential buyer may inquire about the ad.
  • Bill sees Susan’s ad online, and places a call to Susan’s cell phone.
  • Bill’s call goes to voicemail, and he becomes frustrated since he is in a bit of a rush to buy a suitable restaurant in Palm Beach County.
  • Bill then ‘Googles’ Susan’s cell phone number, and discovers other online ads that Susan has placed over the years seeking to hire employees for her restaurant.
  • Bill is thus able to discover the actual identity of Susan’s restaurant including its name and address.
  • Bill hops in his car and drives to the restaurant so that he may talk to the owner about the potential sale.
  • Susan’s confidentiality is thus breached, and there is unfortunately a serious risk that Bill speaks to employees or customers in the restaurant, and mentions the restaurant’s sale .
  • The breach of Susan’s confidentiality would never have happened had she used an intermediary – such as a professional business broker – to be the initial point of contact for Bill in the online ad.

Non-Disclosure Agreement Protects Integrity of the Deal

In addition to protecting the seller’s confidentiality, a proper NDA also protects the integrity of the deal itself including all parties to the deal such as the intermediary (typically a professional business broker).  A proper NDA will restrict the potential buyer from contacting or dealing with the seller directly. This is mean to ensure that the seller’s privacy is protected and that all professional communications is filtered thru the intermediary. Only until after a deal is ‘under contract’ by virtue of a signed Letter of Intent or purchase agreement may a buyer properly deal directly with the seller.

Non-Disclosure Agreement Protects Broker’s Commission

Although not the explicit goal of an NDA, protecting the broker’s commission from circumvention is a necessary provision used by virtually all professional business brokers. This ‘non-circumvention’ clause stipulates that the potential buyer may not collude with the business seller by excluding the broker from the deal and thus excluding the broker from garnering their earned commission. In fact, most business brokers have a 24 month continuation clause in the NDA, whereby the buyer is responsible for ensuring the broker’s commission is paid so long as they buy the business in question within 24 months after signing the NDA.

Any serious buyer will be glad to sign an NDA and abide by its confidentiality provisions. It is the role of a business broker to protect the seller from any potential buyers who do not qualify financially, or do not agree to properly protect the seller’s confidentiality and the integrity of the deal under a broadly worded Non-Disclosure Agreement.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.

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