NDAs in Business Sales

Selling or buying a business usually requires the exchange of commercially sensitive information. This can include financial records, customer information, supplier arrangements, pricing, intellectual property, business plans and operational information.

A non-disclosure agreement (NDA), also known as a confidentiality agreement, establishes rules governing how confidential information may be used and disclosed.

For sellers, an NDA can help protect the business while potential buyers investigate the opportunity. For buyers, it can establish clear expectations around the information they receive during the transaction.

What Is an NDA?

An NDA is a legal agreement governing confidential information disclosed between parties.

In a business sale, the seller will often disclose information to a prospective buyer so that the buyer can assess the opportunity and conduct due diligence.

The NDA establishes obligations concerning how that information can be used, stored and disclosed.

Why NDAs Matter in Business Sales

A business sale can involve information that would be commercially damaging if it became publicly known or reached competitors.

For example, disclosure of a potential sale could concern employees, customers, suppliers or competitors if it occurs before the transaction is ready to be announced.

An NDA can therefore form an important part of a controlled sales process.

What Information Can Be Protected?

The definition of confidential information should be appropriate to the transaction.

It may include:

• Financial information.
• Management accounts.
• Customer lists.
• Supplier information.
• Pricing information.
• Business strategies.
• Marketing plans.
• Trade secrets.
• Intellectual property.
• Technology and software information.
• Operational processes.
• Contracts and commercial arrangements.

The agreement should make clear what information is covered rather than relying on an unnecessarily vague or impractical definition.

Who Should Sign?

The NDA should identify the parties who are expected to receive or disclose confidential information.

Depending on the transaction, information may also need to be shared with professional advisers, lenders, investors or members of a buyer's acquisition team.

The agreement should address whether and under what circumstances those third parties can receive confidential information.

Permitted Purpose

A well-drafted NDA should normally specify the purpose for which the confidential information may be used.

In a business acquisition, that purpose might be evaluating, negotiating or completing the proposed transaction.

Restricting use to the agreed purpose helps prevent information supplied for due diligence from being used for unrelated commercial purposes.

Common Confidentiality Exceptions

Confidentiality obligations commonly contain exceptions for certain information.

Depending on the agreement, these may include information that:

• Is already publicly available.
• Was already lawfully known by the recipient.
• Was independently developed without using confidential information.
• Is lawfully received from another source.
• Must be disclosed by law or a regulatory authority.

The precise wording matters and should be reviewed by an appropriate legal adviser.

Who Can Receive the Information?

A buyer may need to disclose information internally or to professional advisers to evaluate the acquisition.

The NDA may therefore permit disclosure to specified representatives, such as:

• Directors.
• Employees involved in the transaction.
• Accountants.
• Lawyers.
• Tax advisers.
• Financial advisers.
• Financiers or potential funding providers.

The agreement may also require the recipient to remain responsible for confidentiality obligations applying to those representatives.

How Long Does Confidentiality Last?

The confidentiality period should be considered carefully.

Some information may require protection for a defined period, while particularly sensitive trade secrets may require protection for longer, subject to applicable law and the wording of the agreement.

The appropriate duration depends on the nature of the information and the transaction.

Returning or Destroying Information

An NDA may specify what happens to confidential information if negotiations end without a transaction.

The recipient may be required to return or destroy documents and electronic copies, subject to any permitted retention requirements.

This can be particularly important where the seller has disclosed extensive financial, commercial or technical information during due diligence.

What Happens if an NDA Is Breached?

The consequences of a breach depend on the agreement and applicable law.

A breach can potentially cause commercial harm, particularly where confidential information reaches competitors or customers.

The NDA may provide contractual remedies, but the appropriate response will depend on the circumstances. Legal advice should be obtained if a serious breach is suspected.

Common NDA Mistakes

• ❌ Using an NDA that does not reflect the actual transaction.
• ❌ Defining confidential information too narrowly.
• ❌ Failing to identify permitted recipients.
• ❌ Allowing confidential information to be used for unrelated purposes.
• ❌ Ignoring legally required disclosures.
• ❌ Failing to address information already publicly available.
• ❌ Setting an inappropriate confidentiality period.
• ❌ Forgetting what happens when negotiations end.
• ❌ Sharing sensitive information before appropriate confidentiality arrangements are in place.

Advice for Sellers

Sellers should consider what information a buyer genuinely needs at each stage of the process.

A controlled disclosure process can reduce unnecessary exposure of sensitive information.

Before releasing information, consider:

• ✔ Whether the prospective buyer is sufficiently credible.
• ✔ Whether an NDA has been signed where appropriate.
• ✔ What information is necessary at the current stage.
• ✔ Whether particularly sensitive information should be withheld until later.
• ✔ Whether customer and employee information requires additional protection.
• ✔ Whether personal data is being handled lawfully.

Advice for Buyers

Buyers should understand the restrictions that apply to information received under an NDA.

Confidential information should only be used for the agreed purpose and shared with permitted representatives.

Buyers should also avoid assuming that information received during due diligence can automatically be used after the transaction if the deal does not proceed.

NDA Checklist

• ✔ Identify the parties.
• ✔ Define confidential information.
• ✔ State the permitted purpose.
• ✔ Identify permitted recipients.
• ✔ Address legally required disclosures.
• ✔ Include appropriate confidentiality exceptions.
• ✔ Set an appropriate confidentiality period.
• ✔ Address return or destruction of information.
• ✔ Consider personal-data requirements.
• ✔ Consider remedies for breach.
• ✔ Check whether the agreement is mutual or one-way.
• ✔ Obtain legal advice where appropriate.