Selling Your Company? Do Not Give Any Information Until You Have Considered This.

You walk out of a meeting with the CEO of ACME Co. after he offers to buy your business for an obscene amount.  Shaking your hand, he mentions that his people will be in touch to start due diligence, and casually asks that if it wouldn’t be too much of a problem, could he get a copy of your income statements and a current AR aging report so he can get comfortable with the price he is offering and explain the economics of the deal to his Board.  Given that you don’t want to give him any reason to reconsider, you get the information while he waits for his car.

The next day, you get an email from the CEO saying that although it isn’t a huge problem, he really needs a bit more detail on your pricing and expenses – he needs to drill down to find more margin.  You go to bookkeeping, they run the report and you forward it to the CEO.  A couple of days go by and no reply from the CEO.  His assistant tells you he is in meetings, so you figure he is busy.

Your VP of Sales shows up on your doorstep with a big problem – your largest customer just called to tell him that they were changing suppliers at the end of the month  – they found better pricing.  Your first thought is how this will impact the proposed sale to ACME, that is, until your VP says that he was surprised by the customer’s decision because he didn’t think ACME was competing in your market.

It hits you – you gave ACME access to your pricing, your margins and, worse yet, your customer list.  Panic sets in and it gets worse when you see the email from the CEO of ACME thanking you for your time and regretting  to tell you that your business doesn’t fit into their long range plans.

Once you catch your breath, you call your attorney – you were going to call him, but it seemed a bit premature.  His first question rattles you – he asks for the Non-Disclosure Agreement ACME signed.  You tell him that you thought that came later, during due diligence.  He asks what you sent to ACME and he sighs audibly when you answer – you know that can’t be good.

Your attorney explains that, although you may have some remedies against ACME, it will be an expensive and uncertain process – and, from a business perspective, the horse has left the barn – ACME has your pricing info, your customer list and they are using it to poach your customers.  You can argue that the information is confidential and a trade secret, but you didn’t mark the reports or tell the CEO that it was confidential.  Your attorney says that he will have to talk to one of the litigators to determine whether you can obtain an injunction to preclude ACME from using the information – and that you need to clear your calendar – which will be next to impossible because you know that you have to set up meetings with each of your customers.

This scenario is a bit of an exaggeration, but it is based in reality – and you need to be prepared to avoid such a disaster.

The first rule when selling a business is not to give any information to a prospective buyer that isn’t already publicly available – in fact, this extends to just about any party involved in the sale of your business, whether it be an investment banker, a business broker or a M&A consultant.  Any professional you engage will usually volunteer to keep your information confidential as part of the engagement and some are required to keep it confidential even without an agreement – such as your attorney.  However, any third party that is not employed by you or acting as your agent should not be given any information without first signing a Non-Disclosure or Confidentiality Agreement.

In the absence of a Non-Disclosure Agreement, you cannot rely on a significant measure of protection with respect to information you disclose, even if you think it is obviously confidential.  Third parties have limited duties to you with respect to the information you provide them (a discussion of which will be saved for another time), and, as a result, the best way to protect your information from being used against you is to get a comprehensive Non-Disclosure Agreement prior to disclosing any information.

A well drafted Non-Disclosure Agreement should address a number of issues, including the following:

  • The determination of what information will be “confidential” – what specific information do you want to remain confidential and how will it be identified
  • The confidentiality of the information being disclosed – the recipient must agree that they will hold the information confidential and will not disclose it to third parties, as well as the scope of their duty to protect your information from disclosure
  • The permitted use of the information – the recipient must agree to limit the permitted use of the information. If the information is to be used to evaluate the business in an acquisition, the purpose should be so limited – the recipient cannot use the information for any other purpose such as to figure out your margin and use that when pricing their product or soliciting your customers
  • Non-solicitation – of your customers, your vendors, your employees. The recipient should agree that they will not use the information you provide to solicit any of those parties to your detriment.
  • Return or destruction of information -the recipient must agree that they will return all information, that they will not retain any copies and will destroy all information that incorporates any of your information
  • Limiting disclosure within the organization – the agreement should set forth who at the recipient can access the information as well as the recipient’s advisors – and the recipient being liable for breaches by their employees and agents
  • Consent to injunctive relief and venue/jurisdiction – the recipient must agree that you can obtain injunctive relief and agree that you can bring the action in your “home” court

Of course, these are only a few of the provisions that may apply to your situation – so please make sure to discuss your particular circumstances with your attorney.

This publication is intended to provide general information.   It is not, and should not be construed to be, legal advice or an opinion on specific situations.  You should consult with legal counsel before taking action to ensure its applicability to your particular situation.

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