What is a Non-Disclosure Agreement (NDA)?
When considering selling your business, there will come the point when potential buyers ask you to share important company information. Some of this will include critical details about your assets, customers, and internal processes. Although it’s the right of every buyer to vet a business before purchase, you don’t want them to disclose your information to the public or any external entity. It could easily get into the wrong hands.
That’s where an NDA comes into the picture. Having the buyer sign this legal document grants you the ability to take legal action and seek damages should they fail to keep things confidential. On the flip side, if you’re looking to acquire a business, signing an NDA will let the seller know that you’re serious about buying.
But what exactly goes into the NDA? How do you create one for your business? We answer these questions and more below.
What Is An NDA?
An NDA, or non-disclosure agreement, is a legally binding agreement that guarantees confidentiality in sale and purchase transactions. The confidentiality typically pertains to information that gives a business an economic advantage over its competitors. Having an NDA binds all parties to secrecy and defines the grounds of legal recourse in case of a breach. As such, the agreement allows a seller and buyer to exchange information without fear of disclosure freely. Everyone is forbidden from revealing sensitive details, whether through verbal dialogue or other means such as images, videos, or text.
One of the main benefits of an NDA is that it can be customized to suit your business needs. For example, the contract allows you to define what information you cannot disclose, which may cover anything literally. You can write an NDA to protect your website login, revenue model, social media accounts, product idea, and more when selling your business. An interested buyer who refuses to sign the agreement is either not interested in purchasing your company or has another motive behind their willingness to buy. It’s a useful assessment.
Generally, the NDA prohibits potential business buyers from disclosing any confidential information the seller provides them with. But the parties can also sign a mutual non-disclosure agreement where they agree not to reveal any sensitive details about each other. This type of NDA comes in handy when two companies are negotiating a merger or joint venture and want to keep their information secret.
What Goes Into an NDA?
Most NDAs have a specific structure that compromises of the following elements:
Definition of confidential information
The definition and scope of “confidential information” can vary in business transactions. As such, NDAs clearly define what information should (and should not) be taken as confidential.
Parties
Who are the parties receiving access to the confidential information? Ensure the NDA highlights the names of the seller and buyer, as well as any third-party critical to the business deal.
Duration of agreement
A non-disclosure agreement includes the length of time the parties want it to last. The term can be two years, five years, or indefinite. Often the NDA lasts longer than a particular business relationship to keep critical information secret.
Permitted use of information
It’s also common for NDAs to define the purpose of information sharing and the acceptable use of confidential data. For instance, a seller can limit the use of information to evaluate a company’s performance and nothing else.
Return or destruction of information
At the end of the NDA agreement, the recipient party typically needs to delete or return all the confidential information along with materials shared with it. Most non-disclosures include a clause defining when and how this should occur.
Jurisdiction
This section of NDA lists the city/country where court proceedings will be held in case of a dispute regarding confidentiality. For instance, Canadian business sellers may want the agreement to be governed according to the legislation of their specific state and the laws applicable in Canada.
Remedies
In the event of a breach, the affected party is entitled to monetary relief. But since the costs of a breach are difficult to calculate, it’s common for NDAs to list what constitutes fair compensation through parties’ mutual agreement.
Attorneys’ Fees
An NDA also highlights who will pay the legal fees should one of the parties file a lawsuit. Typically, the disclosing party is responsible for paying the attorney’s fees, but the involved parties can also mutually agree to share the costs.
No Binding Clause
Signing an NDA does not necessarily mean there will be ongoing negotiations between the parties. The agreement includes a no binding clause that reserves the right of both parties to terminate the relationship at any point.
What Doesn’t Go into an NDA
To help eliminate the confusion between confidential and non-confidential information, most NDAs have specific exclusions for resources that are not subject to the non-disclosure requirements. Common exclusions pertain to:
- General industry knowledge (trends, market shifts, law changes, etc.)
- Publicly available information (i.e., information anyone can access)
- Knowledge the buyer had or gained prior to the NDA
- A process or strategy the buyer developed independently
- Information disclosed by a third party who is not subject to the NDA
Besides these exclusions, remember that the buyer may need to share the confidential information with an assistant, lawyer, or another party. When writing an NDA, make sure to list who the receiving party is entitled to disclose information. You could also require the buyer to inform their associates about what information is confidential and bind them to the terms of non-disclosure.
What’s Optional in an NDA?
Here are some clauses that you may consider but are not always necessary to include in an NDA:
Non-compete clause
If you’re the seller, you can include a provision in your NDA that prohibits the buyer from dealing with competitors. However, including such a clause can backfire during legal proceedings due to competition law and fairness of trade. As such, we recommend speaking with an attorney before drafting the terms of this provision.
Pro tip: If you’re considering buying a business and have been asked to sign up to a non-compete, make sure to seek legal advice before putting your signature on the agreement.
Non-solicitation clause
This clause restricts the buyer from soliciting the seller’s suppliers, customers, or employees for a specified period. NDAs typically include non-solicitation when the seller and buyer belong to the same industry. Having this clause in place can help ensure a smooth exit, but it can also be regarded as a restraint on trade. Make sure you work closely with your attorney when planning to add a non-solicitation to your NDA.
Sample Non-Disclosure Agreement
If you’ve never created an NDA, you might want to start by filling in a sample agreement. This should give you an idea of what’s required and what the legal document looks like when it’s completed. Here’s a standard NDA template put together by eForms.
In this NDA, it’s agreed that the recipient won’t disclose any information regarding the business entity’s internal, non-public, financial, and client information. And both parties will need to mention their name in the first field of the form. Also, if the recipient does not proceed with the acquisition, they cannot use the supplied information in a way that would be damaging to the business. The agreement further states that the recipient has to abide by the court’s laws exercising jurisdiction in the state mentioned on the NDA.
Important: Do some research before deciding where your NDA will call for jurisdiction. State laws differ in the way they comprehend these agreements. For example, California discourages non-compete and non-solicitation clauses, so it’s better to choose another state if you’re planning to include them in your NDA. Otherwise, your non-disclosure agreement could be null or void.
How to Write a Non Disclosure Agreement
Although templates make it easier to create non-disclosure agreements, you can still learn how to write an NDA. Here are the steps.
1. Name the Agreement
A non-disclosure agreement can also be referred to as a confidentiality agreement, but we recommend writing “non disclosure” in the title for simplicity. This should be followed by a brief description of the NDA’s purpose and the parties’ introduction.
2. Outline the confidential information
The next step is to mention all types of information that you want to keep confidential. This can include your social media strategy, email list, survey results, website software, and patient rights. Analyze your business to identify things that give you a competitive advantage and keep those things secret.
3. Mention the exclusions
Exclude information that’s already accessible via public records, such as profit and loss information, work phone number, etc. Additionally, don’t mention anything that’s already known to the other party.
4. Define the conditions of disclosure
Make sure to list the terms under which the recipient can disclose the information to their representatives. You also want to ensure that these associates will treat the information in line with the constraints applied through the NDA.
5. Specify protection measures
Clearly define how you want the recipient to protect your confidential information. For example, you may require login credentials to be kept offline in a secure location and not used without prior consent. And while you’re at it, remember to specify how the recipient should destroy or return the information.
6. Establish a time period
Specify a timeframe in which the information must not be shared with other parties. Include a start date and end date to let the recipient know when the NDA will become effective. If you’re not sure about what length of time is suitable for your agreement, go with the typical limit, i.e., two to five years.
7. List the consequences of a breach
In most cases, the person sharing information seeks financial compensation – a specific dollar figure set by the NDA. If you’re thinking along the same lines, make sure to include a number high enough to get you sufficiently compensated for potential damages. It’s also a good idea to clarify who’ll pay the attorney’s fees in this section.
8. Consider including an ADR clause
ADR stands for alternative dispute resolution and allows parties to settle disputes out of court. If you want a neutral person to find a resolution for both parties, it makes sense to include the ADR clause in your agreement. ADRs are quicker and more flexible than standard court proceedings. And since using ADR is a private affair, you don’t have to worry about your information being revealed in the court.
9. Pick a state whose law will apply
Let the recipient know which state’s law applies when it comes to a lawsuit. Ideally, you should choose a state you live in since you’re likely to be familiar with its law. The local court is where you’ll file a temporary restraining order against the breaching party to limit the spread of your business information.
10. Include blocks for signature, name, and date
At the end of the document, leave empty blocks for the signature and name of the recipient. And don’t forget to include one for the date. You can also consider making the signing process more convenient by letting the recipient sign electronically.
Exchange Encourages the Use of Non-Disclosures
Sellers of online businesses are often asked to share sensitive information with prospective buyers when the buyer conducts due diligence. It’s during this process that you should consider using an NDA. If you’re considering selling your online business via Exchange, we recommend drafting a non-disclosure agreement and getting it checked by a legal professional for relevancy. Then you can send the agreement to a potential buyer.
The Exchange Marketplace lets you privately send messages to potential buyers, so you can have peace of mind knowing regular site visitors can’t access the agreement. This agreement works both ways, so you’ll even have a sense of security when you’re communicating with a seller for a purchase.
Conclusion
When it comes to business sale and purchase, confidentiality is a must. With it, you can protect your company’s secrets and retain the competitive advantage you’ve worked so hard to build. An NDA comes under the umbrella of the things that enforce confidentiality on all parties. Whether you are trying to exit from your business or considering an investment, a non-disclosure is a great way to protect critical business information from public exposure.
