• BLOG
Chase Piotrowski, February 27 2024

Why Do I Need to Sign an NDA?

During the M&A process, when a seller is looking to put their business up for sale, they are concerned with confidentiality.

The vast majority of M&A deals involve privately held businesses, which means they are not required to publish detailed financial information that the public can see, as publicly traded companies are.

However, for a prospective buyer to make an informed decision about the business they will be buying, they will need access to information the business owners would not want to become public.

So, the seller wants to keep the details about how their business operates and the fact they are looking to sell confidential—but the buyer wants as much information as possible about the business they are buying. This is where non-disclosure agreements come into play.

Why is Confidentiality so Important to a Seller?

To understand NDAs, you must first understand why confidentiality is important to a seller in the M&A process.

If word were to get out that the founder was looking to sell the business, and that business’s information was to get released to the public, unintentionally, here are some potentially negative side effects:

• Key employees could get nervous and start looking for other jobs.

• Large customer accounts could get nervous about doing business with a different corporation (the buyer) they have no relationship with, and not renew their accounts when contracts are up.

• Customers in general could not approve of a potential sale or think the business isn’t doing well.

• Competitors could gain insight into key accounts or how the company operates.

• Insights into R&D efforts could be leaked before the opportunity to monetize that research has been realized (ie. They had the costs to develop, but now their competitors are privy to the results before the company could start to sell their efforts).

• Suppliers could find an opportunity to renegotiate contracts or accounts payable terms.

Because of these reasons, sellers can be apprehensive at this stage. The M&A process has to take considerations for the seller’s confidentiality into account, and signing a Non-Disclosure Agreement or NDA is the best way to do that.

What Happens If You Violate an NDA?

If you have signed an NDA and violated it by disclosing confidential information illegally, you can be subject to lawsuits from the other party to the NDA as you have breached the contract. You may also be sued for intellectual property violations such as copyright infringement and breach of fiduciary duty. A court may levy financial damages and associated legal costs.

The Bottom Line

Non-disclosure agreements are low-cost, easy-to-create legally binding documents between two or more parties that keep private information confidential. They are used by organizations and individuals to protect their businesses or personal information and allow businesses to work together without the fear of private information entering the hands of competitors.

Written by

Chase Piotrowski


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