Confidentiality Agreements: Their Importance To Business Buyers And Sellers

If you are planning to buy a business in the near future, or sell one for that matter, then you are probably thinking about the price you may have to pay, scheduling business appraisers, collating legal documents, putting in an offer and so on. The list of things to do is indeed long. However, one if the things that very few people actually consider before their lawyers bring it up is the necessity of confidentiality agreements.

Confidentiality agreements are essential cogs in the mechanism of business acquisition because they protect both the buyer and seller just in case anything should go wrong a little further down the line.

The Nature Of The Confidentiality Agreement

Confidentiality agreements are legally binding documents that govern what can and cannot be disclosed to third parties. Obviously any potential seller is legally required to make full disclosure of all relevant details that may affect the sale of the business to the buyer, which is why confidentiality agreements are signed before the buyer can examine the business.

Confidentiality agreements are commonly drafted by lawyers and can be pages long, depending on the level of security required to protect the information that may or may not be disclosed. This is obviously dependent on the type of industry and nature of the business.

However, buyers may want to consult with third parties about future business issues to determine whether or not the acquisition would be worth their while and so it is common for any given agreement to be negotiated between the legal teams of both parties to decide what information must remain between the buyer and seller and what can be revealed to relevant parties, and they are usually named within the agreement paperwork itself. Until the negotiations are complete, no information will pass between the buyer and the seller at all.

There can be any number of items included in the individual agreement, inclusive of but not limited to sensitive paperwork, accounts, privileged information, intellectual property, technical knowledge, staffing records and the value and nature of assets. All of these items are unique to any business and can affect its reputation and trade in the future, as well as the overall value. As such, confidentiality agreements can protect the seller just as well as it does the buyer

Business Brokers And Confidentiality Agreements

However, individuals and companies that are selling their businesses are not the only ones that may ask you to sign confidentiality agreements. Business brokers may also ask for confidentiality agreements to be signed before they even show you a business that you may like to buy. This is also to protect their interests. If they show you a business for sale, there is nothing to prevent you from going directly to the seller or another business broker and taking the sale elsewhere. As such, introductions are often made under legally binding paperwork.

The main thing to remember though, whoever is asking you to sign a confidentiality agreement, it is completely normal and protects the interests of all of the parties concerned, including yours!
Courtesy, GlobalBX November 2009