Selling a business comes with meaningful confidentiality concerns: until the purchase agreement is finalized, most owners want to make sure that employees, investors, and customers don’t know their companies are available for purchase.
For buyers, this means that in most cases, you’ll have to sign a non-disclosure agreement (NDA) to obtain any meaningful information about a business for sale. This is especially true for deals represented by brokers, who see safeguarding the seller’s confidentiality as an essential part of their jobs. Brokers each use different NDAs for their processes, and buyers need to sign them in order to receive the confidential information memorandum. This means that buyers could sign dozens, if not hundreds of NDAs over the course of a thorough search process.
Brokers frequently advise buyers to sign the NDA without redlines or pushback. Especially for high quality deals, they will usually have enough interest to only engage buyers that are willing to participate in their preferred process. Buyers that try to negotiate the terms of an NDA can be viewed as unserious or lacking in knowledge about the SMB acquisitions process. While this can be frustrating to buyers, “just sign the NDA” tends to be the standard operating procedure if you’re interested in the deal. However, buyers should still carefully read the terms of each NDA they receive. While most brokers operate in good faith using a standard set of terms, there can be bad actors that try to include non-standard language in their documents. In some rare instances, buyers may be forced to choose between losing a deal and signing a broker NDA that seems overly onerous.
Don’t take this as legal advice, we are just sharing our experience with searchers. You should always consult with a licensed attorney for legal matters.
Below are several common terms we’ve seen in broker NDAs, along with example wording.
Definition of Confidential Information in a Broker NDA
Typically the NDA will cover confidential financial and non-financial information about the business, the identity of the business and business owner, and the fact that the business is for sale. Since protecting confidential information is one of the most important elements of the NDA, this language will be in every broker NDA that a buyer will see. Information that becomes known by the general public or is publicly available should not be covered by an NDA.
“That any information provided or made available on any business is sensitive and confidential, and that its disclosure to others may be damaging to the businesses and their owners.”
Example 1
“The term “information” shall include the fact that the business is for sale and other confidential data. The term information does not include any information, which is or becomes generally available to the public or is already in Buyer’s possession.”
Example 2
Description of who is allowed to receive Confidential Information
A Broker NDA will limit the people who can get access to the information through the buyer and will bind additional recipients of the information (such as colleagues or members of the buyer’s deal team) to the same terms as the NDA.
“Buyer will not disclose any Information regarding this business to any other party, except to those directly involved in the sale or to those who will provide Buyer with professional, legal or financial advice on the sale, in which case Buyer agrees to obtain their consent to maintain such confidentiality”
Example 1
“…not disclose any such Confidential Information to any person or entity, except to the Recipient’s Representatives who need to know the Confidential Information in relation to the Purpose and are informed of the obligations hereunder and agree to abide by the same. Recipient will promptly notify the Disclosing Party of any unauthorized disclosure of Confidential Information or other breaches of this Agreement.”
Example 2
Protection for the broker’s commission
One of the brokers’ top priority with the NDA is often to protect their right to receive a commission from the sale of the business and not be circumvented in the transaction. While not present in other kinds of NDAs, buyers should expect to see language addressing this topic in the vast majority of broker NDAs.
As part of this piece, NDAs will often have provisions that prevent the buyer from communicating with the seller or their employees without using the broker as a go-between. While we tend to see these kinds of provisions as being constraining, they’re very common, and most buyers will need to sign NDAs containing this language if they want to pursue an acquisition represented by a broker. If possible, it can be helpful to evaluate the broker themselves – while being willing to work with a broker as an intermediary is important for a buyer, it’s equally important for brokers to share sufficient access to the seller in order to help build a relationship and ensure sufficient information is transferred. If the broker refuses to provide access to information, even after an NDA is signed, that can be a red flag.
Notably, clauses designed to protect the broker’s commission can be places where unfavorable terms are hidden. For example, be careful about non-circumvention clauses that obligate you to pay the broker’s commission (or other fees) broadly, not just if you overtly cut the broker out of the deal.
“(d) Not to contact the business owners or their landlords, employees, suppliers or customers except through Brokers. All correspondence, inquiries, offers to purchase and negotiations relating to the purchase or lease of any business presented by Broker will be conducted exclusively through Broker. I/We understand that I/we could be personally liable for monetary damages if I/we contact a Seller directly or otherwise circumvent Broker and such contact and/or circumvention disrupts or otherwise affects a Seller’s business operations.
(e) Not to circumvent or interfere with Broker’s contract with the Seller in any way. I/we understand that if I/we interfere with Broker’s contract right to its fee from a Seller, I/we may be personally liable to Broker for payment of the Seller’s fee. I/we understand that if I/we make the purchase through Broker, I/we will not be liable for the fee paid by Seller to Broker.”
Example 1
“If Buyer discloses the availability of this business to another party, and that party purchases or causes the purchase of that business without Broker, or if Buyer interferes with the Broker’s right to a commission from the Seller in any manner, then Buyer agrees to be responsible for payment of Broker’s commission as outlined on the listing agreement for that business.
All negotiations concerning this business will be handled Exclusively through Broker. No contact with the Seller, Employees, suppliers, customers, Franchise or Landlord, etc. in the scope of this transaction is permitted without direct authorization of the Broker.”
Example 2
Disclaimer language around information provided about the business
an engagement with a broker, buyers will receive a large amount of information about the seller and the business in question. To protect themselves from liability, brokers typically include disclaimer language in their NDA. This means that buyers won’t be able to sue the business broker if information provided during the diligence process is incomplete or incorrect. This is important because the broker is also dependent on the seller for information and may not be able to verify the veracity of what they’re receiving. The clauses typically put the onus on the buyer for due diligence of the business, not on the broker.
“That all information regarding businesses for sale is provided by a Seller or other sources and is not verified in any way by Broker. Broker has no knowledge of the accuracy or completeness of said information and makes no representations or warranties, express or implied, as to the accuracy or completeness of such information. Understanding that, I/we shall perform my/our own due diligence and shall make an independent verification of said information prior to entering into an agreement to purchase any business. I/we agree that Broker is not responsible for the accuracy or completeness of any of the information I/we receive or fail to receive.”
Example 1
“All information is provided by Seller and is not verified in any way by Broker. Broker is relying on the Seller for the accuracy and completeness of said information. Broker has no knowledge of the accuracy of said information and makes no warrant, express or implied, as to such information. Broker may provide certain analysis of information provided by the Seller that may contain interpretations and/or evaluations and that no representations of warranties are made by the Broker as to its accuracy or completeness. Buyer agrees to indemnify and hold Broker harmless from any claims or damages resulting from its use.
Prior to finalizing an agreement to purchase or invest in this business, it is Buyer’s responsibility to perform due diligence and make an independent Verification of all Information. Buyer will only look to the Seller and Buyer’s own investigation for all this information regarding this business offered by the Broker.”
Example 2
Duration of the NDA
NDAs we have seen from brokers have a duration of 1-3 years, with an average of 2 years. As a general rule, the longer an NDA requires you to maintain its provisions, the more careful you need to be when it comes to evaluating your future plans relative to the limits the NDA places on you.
Red Flags to look for in a Broker NDA
While most broker NDAs contain some combination of the terms listed above, here are a few examples of red flags shared by members of our community that demonstrate the importance of carefully reading all legal documents.
- Non-compete clauses associated with the seller’s line of business – if you end up not buying the specific business in question, this clause could create legal liability for you if you end up buying something similar.
- Very broad or lengthy non-solicitation clauses – while it makes sense to sign a non-solicitation clause not to solicit a prospect’s employees or customers, clauses that are overly broad beyond the specific work of the seller, or are so lengthy as to close you out of a particular talent pool for the foreseeable future, can be considered red flags.
- Any requirements for the buyer to pay fees to the broker for representation – this would be a conflict of interest for the broker, who is responsible for supporting the seller through the process and gets their commission from the seller’s cut of the transaction. Buyers may hire a separate “buyer’s” broker, which would change this equation, but seller representatives should not obligate the buyers financially in the normal course of business.
- Overly broad or strangely-constructed IP protections – upon purchasing the business, the IP of the business typically belongs to the new owner (subject to negotiation). If an NDA stipulates that certain IP belongs solely to the seller indefinitely, it’s worth asking a question about that clause.
- Any requirements to use the broker’s form documents for purchase agreements (or the inclusion of any sale terms in the NDA at all) – a purchase agreement is a negotiated document and you shouldn’t be constrained by the form those negotiations take.
- Any stipulations of future work/relationship between the buyer and broker (or buyer and seller) beyond the existing transaction. You are under no obligation to work with the broker again, and the seller’s involvement should be up for negotiation.
- Requirements for the buyer to pay the seller’s tax obligation on the deal
As we stated above, this article encompasses our experience, and the experience of members of our community at Private Market Labs. Make sure to be cautious when taking legal advice from anyone who is not a lawyer (including us – we’re just here to help smooth the acquisitions process). A good rule tends to be: if something seems strange, consult an attorney experienced with small business M&A.