What a Nondisclosure Agreement Covers When You Sell a Business

What the agreement protects

The agreement is a promise by the buyer to keep what they learn private and to use it only to decide whether to buy your business. That sounds simple, and it covers more ground than most owners expect. The fact that the company is for sale is itself protected. So are the financial results, the customer and supplier names, pricing, employee pay, the methods you use to win and deliver work, and anything the buyer writes down about any of it.

The sale itself matters to protect because of who finds out. Employees who hear the owner is selling start to wonder about their jobs, and the best ones tend to get calls from recruiters first. Customers who hear it wonder whether service will change. A landlord, a lender or a competitor may each behave differently once they know. Our post on how we market a business confidentially describes the steps we take before a buyer ever reaches the agreement, such as marketing the business without its name.

The agreement also sets the purpose. Information shared under it may be used to evaluate the purchase and for nothing else. That one phrase stops a buyer from using your pricing sheet to adjust their own, or using your supplier list to approach those suppliers next month.

Who signs, and who they bring along

The person signing is often a person, but the buyer may be a company, a fund, or an individual backed by partners. The agreement should be signed by the entity that will evaluate and buy, and where the buyer is an individual, it should say who else may see your information. A buyer will usually want to share it with their lender, their accountant, their attorney and perhaps a family member who is putting in money. That is normal and you should allow it, but the agreement should require each of those people to keep it private on the same terms, and it should make the buyer responsible if one of them does not.

Pay attention to affiliates. A buyer that is a large company with many subsidiaries may have a division that competes with you. The agreement can limit who inside the buyer's organization sees your material, and in a sale to a competitor it often should. We tend to keep the most sensitive material back until late in that kind of deal regardless of what the paper says.

What counts as confidential, and what does not

Most agreements define confidential information broadly and then list a few exceptions. The exceptions are usually fair. Information that was already public, information the buyer already had before you shared it, information the buyer received properly from someone else, and information the buyer built on their own without using yours. Owners should read these exceptions carefully, because a loose one can swallow the rule. If the buyer says they "already knew" your biggest customer, the agreement should require them to be able to show that, in writing, from before the date they signed.

Watch the way the definition treats things the buyer observes. A buyer who tours your shop or warehouse learns things that are never written down: how the floor is laid out, who the foreman is, how orders move. A good agreement covers what the buyer sees and hears as well as what is handed to them, and it covers notes and summaries the buyer prepares from it.

There is usually also a carve-out allowing disclosure when a court or agency orders it. That is standard. The agreement should require the buyer to tell you first when that happens, if the rules allow, so you can respond. Rules vary by state and your attorney confirms what applies.

The clauses owners overlook

The core promise gets all the attention, and the clauses around it do much of the work. The first is the term. Some agreements run a couple of years, some run until the information is no longer sensitive, and some have no end for trade secrets. An owner whose value rests on a process or a formula should want the longer protection for that part. A pricing sheet loses its sting after a year or so, and a method may not.

The second is a promise not to contact your people. A buyer who has spent weeks in your books knows exactly who matters. The agreement should bar the buyer from approaching your employees, customers, suppliers, landlord and lenders about the sale or the business without going through the advisor or you. Without that clause, a curious buyer may call your biggest account on a Thursday afternoon to "learn more," and the account hears about the sale from a stranger.

The third is a promise not to hire your employees for a stated period. This is a non-solicitation clause. It protects you if the sale falls through and the buyer, now familiar with who does the best work, makes offers. A similar clause can cover your customers. Courts and states differ on how far these can go, so the wording needs your attorney's review.

The fourth is what happens at the end. The buyer should return or destroy your material when the talks stop, and confirm that in writing. Be realistic about this. A buyer's attorney will often keep a copy for records, and the buyer cannot unlearn what they read. The clause is still worth having because it removes the files from casual circulation and gives you something specific to ask for.

The fifth is the residuals clause, which buyers sometimes ask for. It says the buyer may use whatever general knowledge stayed in their memory after the review. Owners should resist this. It can excuse a buyer who walks away and uses your process, because they say they just remembered it.

What an agreement cannot do

An agreement is a promise, and a promise is only as good as your ability to enforce it. If a buyer breaks it, your remedy is a court case, which costs money, takes time and exposes the thing you were trying to keep quiet. Many agreements allow you to ask a court for an order that stops a disclosure quickly, and that is useful, though it comes after the harm has started.

So the paper works together with how you share information. This is why we release material in stages. The first stage gives a buyer a summary and financials with names removed. The customer names, key contracts and employee detail come later, after the buyer has shown they have the money and the standing to buy, and usually after a letter of intent is signed. A buyer who has seen only what they needed to see has little to misuse. Our post on buyer qualification explains how we decide who gets to see what and when.

It is worth asking who the buyer is before you worry about the paper. A competitor, a supplier or a former employee asking for your numbers is a different risk from a financial buyer or a person leaving a corporate job who wants to own something. We screen for that early, and the screening matters more than any sentence in the agreement.

Signing it, and what to push back on

Most buyers sign without a fight. A buyer's attorney, though, will sometimes send back their own form, with changes that favor the buyer. Common changes include a short term, a residuals clause, the removal of the non-solicitation, a wider list of people who may see the material, and a broad carve-out that lets the buyer keep working in your industry. Some of these are fine. Some you should refuse. If the buyer will not agree to a ban on contacting your employees or customers, you should think hard about whether to show them anything.

Have your own attorney read the agreement before you sign it or approve ours. We use a standard form that most buyers accept, and an owner whose business has unusual features, like a patent, a recipe or a technology platform, may want added protection. Rules vary by state and your attorney confirms what applies to you. The ask is small compared with the exposure.

Put a few habits in place yourself. Keep a record of who has signed and when, and which documents each person has received. Number or watermark sensitive files if the platform allows, so a leak can be traced. Tell your own team to send any buyer question to one person. Keep the conversation with a buyer on the phone or in the data room, and avoid sending financials by email to an address you cannot vouch for. Our post on how to prepare a business for sale shows where these habits fit in the larger plan.

A buyer who reads the agreement carefully and signs it promptly tends to handle the rest of the process the same way. When a buyer treats confidentiality lightly in the first week, they are telling you something about how they will behave in the sixth.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.