Business Planning Alert: "Selling a Business? Pay Attention to Your Confidentiality Agreement"

Selling a business can be a momentous event.  The process used to do so should accordingly be carefully considered and implemented.  An early step in the process should be to obtain appropriate confidentiality agreements from prospective buyers.  Unfortunately, that step all too often is not given the attention that it deserves.  There is much to consider when structuring an appropriate confidentiality agreement for the sale of a business.

Three important items to consider are as follows:

• Parties.  One concern that sellers often have is that news of a possible sale will leak out to customers, competitors, and employees.  That is inevitable in many instances.  However, one way to reduce that risk is to maintain anonymity as long as possible in the sale process.  That begins by hiring an advisor (e.g., an investment banker) to reach out to potential buyers on behalf of the seller.  Also, the confidentiality agreement can be structured so that the identity of the seller is not revealed until a potential buyer has delivered a fully executed counterpart  of the confidentiality agreement to the seller’s advisor.
• Scope.  Another concern that sellers often have is that a potential buyer (particularly a strategic buyer) already holds information about the seller that could be used against the seller once other information regarding the seller is provided under the confidentiality agreement.  That risk can be addressed if the scope of the confidentiality agreement covers all information regarding the seller in the possession of the buyer regardless of when obtained.
• Term.  Finally, it is common for confidentiality agreements to last for a fixed term (e.g., 12 or 24 months).  However, information can be protected as a trade secret only for so long as it is kept secret.  If a potential buyer is allowed to disclose an item of information to the public after expiration of a fixed term, that could create a risk that the item is no longer subject to trade secret protection.  In order to address that risk, the confidentiality agreement should continue with respect to any confidential information of the seller for so long as the information qualifies as a trade secret under applicable law.

There are many other items to consider when structuring confidentiality agreements for the sale of a business.  The important thing is to start the sales process off on the right foot by taking the time to thoughtfully consider them, and prepare an appropriate agreement for the circumstances.