Using a Non-Disclosure Agreement to protect your business’s secret info

Friday 15 October 2021

There can be a lot of things to think about when someone offers to buy your business. However, one of the most important things you should keep in mind is how can you protect your business’s secret information.

What is the problem?

The reality is, no buyer will go through with a genuine offer for a business without properly looking into the business first. This investigation is known as “due diligence”, and you should not allow a due diligence exercise to start without first making sure your business information will be protected from exploitation.

A due diligence investigation will require prospective sellers to release commercially-sensitive information about their business to a potential buyer. This information often includes lists of customers; names of star employees; and details of any “know-how” that gives the business a competitive edge.

Once that information is given, the risk is that the deal does not go through for one reason or another and the buying party then knows that secret information, which it could use to try and steal customers or employees.

What is the answer?

The best way to protect against this risk is with a well-drafted Non-Disclosure Agreement (NDA) (also known as a Confidentiality Agreement).

Whilst the primary function of an NDA is to prevent one party from disclosing secret information it learns about the other, in the context of a business sale perhaps the most important provisions to a seller are those relating to “non-solicitation”.

A non-solicitation clause contractually prevents a party from making use of information, as well as keeping it secret from others. It places restrictions on a prospective buyer that prohibit them from trying to steal customers or poach employees if the purchase does not go ahead. Therefore, whilst the buyer will still know this information, these restrictions deter them from using it to unfairly compete with your business. Without such protections in place, there is little to stop the prospective buyer from doing this.

What should you remember?

It might seem farfetched to think a business owner would freely give away their secret business information without protection. However, it does happen when people are focussed on the possible sale and ignore the potential problems if it were to not go ahead.

Before you get too deep into anything with a prospective buyer, please email or call Blacks’ Corporate Law team on 0113 207 0000, to talk about getting a non-disclosure agreement ready to safeguard your business’s value as you move further into the process.