Selling Your Company and NDAs

Most people have heard of non-disclosure agreements (“NDAs”) and most just assume they will be used in a sale transaction. This is not really the case, though.

NDAs, in our experience, have very little practical effect. High integrity people don’t disclose things regardless of whether they signed an NDA. Low integrity people sign NDAs right and left and still can’t keep their mouths shut. And here is the key fact: virtually no one sues on an NDA. It is too difficult to prove a disclosure and, even if proven, it is hard to prove damages. Therefore, NDAs simply have very little effect.

An even larger issue is that buyers, as a general rule, just don’t have the time or inclination to have their lawyer review the NDA and negotiate elements of the NDA (which the lawyer will undoubtedly do given no lawyer has seen a document drafted by another lawyer that they believe is as good as they could draft). In our experience, many buyers will simply pass on a deal that requires an NDA, and this trend continues to increase.

Therefore, we often never ask a potential buyer to sign an NDA. If we do, and the potential buyer rejects the request, we drop the issue and move forward. We are very clear in the materials we provide to the potential buyer that the information is highly confidential, and they are prohibited, by acceptance of the materials, from disclosing the information to anyone other than their legal advisors.

And, as you might expect, technology has come to the rescue with some great tools to encourage confidentiality. First, you are able, at least in AdobeÓ, to create a PDF of virtually any source document and then password-protect it and prohibit the copying and printing of it. We suggest distributing your teasers and books with these protections.  And DocuSign (www.docusign.com) is a useful tool for executing an NDA, but unfortunately does nothing to eliminate the lawyering of the document.

GROW and SELL Advisors, wholly-owned by Traversi & Co., LLC, is a premier sell-side M&A advisory firm – a boutique investment bank – serving the lower middle market.  Visit us here.

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