If you’re trying to sell your business it’s always good news to hear that a party is interested in buying. But what’s the next step? What happens if after the party looks you, your business and your books over, they decide not to buy? How do you protect your business?
One way to do that is through a confidentiality agreement. Whatever your business, no matter the service or products you provide, one of the most valuable things you have is information. That can include your financial numbers, sales information, marketing plans, customer lists and strategic plans. A potential buyer will want to know that information before making the decision to buy or not.
Before opening yourself and your business to scrutiny, obtain confidentiality agreements from prospective buyers. Here are some issues to think about when deciding what contract language will be right for you.
• You may want your identity kept confidential. If word has leaked out your business is for sale you risk your customers looking elsewhere and your competitors spreading the news to their advantage. One possible way to reduce the number of people knowing about the fact your selling your business is to make yourself anonymous. You could hire an advisor, investment banker or broker to reach out to possible buyers on your behalf while the identity of your businesses remains unknown. Your identity need not be revealed until the potential purchaser signs a confidentiality agreement.
• You may fear the possible buyer may use information against you. The prospective buyer may already have some information about your business and when it’s combined with the confidential information you would disclose as part of the sales process, that could be used against you. That risk can be managed if the scope of the confidentiality agreement covers all information about you the buyer possesses no matter when or how that information was obtained.
• Confidentiality agreements often last for a fixed term but information can be protected as a trade secret only for so long as it’s kept secret. If a potential buyer doing its due diligence learns of your trade secrets, decides not to buy and is bound by a confidentiality agreement that lasts a year, there would be no contractual obligation not to disclose this information after the year passes. Once the information is made public it no longer gets trade secret protection under the law. The confidentiality agreement should state that the seller’s confidential information is to remain confidential as long as it qualifies as a trade secret under California or federal law.
Any business deal requires a degree of trust by both sides. But if you’re selling your business, especially if it’s the culmination of years of work, sacrifice and financial investments by you and your family, it’s too valuable just to trust a potential buyer after a handshake. Critical information about your business could come back to haunt you if the sale doesn’t go through and that information is used against you.
One way to start to trust the other party is to know it could face serious legal consequences if a confidentiality agreement is breached. With such an agreement in place you should feel more comfortable opening up your records and discussing your business with a possible buyer.
If you are starting the process of buying or selling a business and want to discuss how a confidentiality agreement could work for you, contact our office so we can talk about your situation, applicable laws and the consequences of such an agreement.