The seller series, part 2

Jul 31, 2017

The non-disclosure agreement is an important piece of any M&A transaction, so make sure it gives you the protections you need during and after negotiations.

In the dynamic world of M&A there are a few key documents that are necessary to ensure a successful and painless transaction. The first document we discussed in “The Seller Series” was the M&A transaction teaser. But what happens after a buyer has reviewed the teaser and has confirmed that they are interested in learning about your firm? Glad you asked! My goal for “The Seller Series” is to educate our readers and demystify key M&A documents associated with a sell-side transaction.

If, after reading a firm’s teaser, the buyer is interested in learning more about the seller, the two parties are advised to enter into a confidentiality agreement, also known as a non-disclosure agreement. The NDA is designed to enforce confidentiality among buyers, define terms of engagement, limit what can be disclosed to third parties, and dictate terms to which counterparties must agree.

Important elements to consider before entering into an NDA include:

  1. Why use an NDA? An NDA is a legal document, designed to protect confidential information from being revealed to unwanted third parties, or being negatively used against the parties disclosing the information.
  2. One-way versus mutual NDAs. A one-way NDA, also called a “unilateral” NDA, protects the issuer of the confidential information. The receiving party is bound to protect and restrict disclosure of such information to any third party. In contrast, if a competitor approached your firm, they may require that you sign a mutual NDA. In this case, any confidential information that you disclose, and any confidential information the competitor discloses, is protected by the NDA.
  3. Define confidential information. The answer to what constitutes confidential information is different in many cases. In an M&A transaction within the AEC industry, usually an NDA stipulates that any information relating to drawings, plans, models, services, transactions, reports, corporate development, pricing, customers (past, current, and prospective), suppliers, financials, and other items is to be kept confidential. Never, and I repeat NEVER, sign an NDA that does not specifically indicate what constitutes confidential information.
  4. Define the terms of the NDA. The term of the NDA specifies how long the confidential information will be protected. Usually, this ranges from two to five years, depending on the nature of the transaction and market conditions. While business owners want to protect their information as long as possible, a buyer doesn’t want to be bound by an NDA for an indefinite amount of time.
  5. Purpose of disclosing information. This will state the specific purpose for which confidential information has been disclosed.
  6. Use of confidential information. Ensure the NDA includes a clause clearly stating that information is not to be used for any purpose other than what was set forth explicitly in the agreement.

Remember to seek the advice of professional legal counsel when drafting or structuring an NDA. For your reference we have a sample NDA available here for download.

The next document we will demystify is the confidential information memorandum, also referred to as the offering memorandum or deal book. Until next time!

About Zweig Group

Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.