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Considerations in Selling Your Business- Part 7: First Step with the Buyer - The Confidentiality Agreement

by Patrick B. Mathis, Shareholder at Mathis, Marifian and Richter, Ltd.

The Confidentiality Agreement

Whether the seller elects to approach potential targeted buyers, utilize an intermediary such as an attorney or broker to make those contacts, or is solicited by a potential purchaser, the first step in any such discussion should be a confidentiality agreement entered into between the buyer and seller.

iStock 81665967 LARGEThese agreements generally provide:

1. That any information shared by the seller with the potential buyer is acknowledged to be “confidential” and will not be used or disseminated by the buyer except to those employees and outside business strategic advisors who may be necessary for the buyer to evaluate and potentially close upon an acquisition of the seller.

2. That the information will remain confidential, both during the period of the parties’ discussions and thereafter, whether or not an acquisition is completed.

3. That any party receiving the information through the buyer, such as an employee or outside accountant or business plan consultant, will be made aware of the confidentiality arrangement and agree to maintain such information in confidence.

4. That the potential acquisition transaction will be maintained in confidence by the buyer and seller until the parties reach an agreement and agree to make that information public.

5. That the buyer will not utilize any confidential information obtained from the seller in its business, such as the soliciting seller’s customers based upon information obtained from the seller during negotiations, if the transaction does not go to completion.

6. That neither party will solicit employees of the other if the transaction is not completed.

In addition, some potential buyers will seek to include an “exclusivity” provision whereby the seller agrees that it will not market the business or have discussions with any other party regarding the potential sale of the business while the buyer is contemplating the purchase. In most cases, sellers will refuse to enter into this provision at such an early stage of discussions, particularly if the seller is soliciting an interest from several potential buyers with whom it anticipates entering into similar confidentiality agreements.

The confidentiality agreement should be signed by each potential purchaser prior to any release of detailed information regarding the seller such as financial statements, tax returns, product information, sales or customer information, or similar data being provided by the seller.

In a few cases, where the seller is concerned about its interest in a sale becoming public knowledge within the industry, an intermediary such as an attorney or broker may enter into a confidentiality agreement with an interested party in which the identity of the seller is not disclosed until the interested buyer signs the confidentiality agreement, making sure even the identity of the selling party is covered as confidential.

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