What is an NDA and does it do anything?

–We are not licensed attorneys, so please do not take this as Legal advice. Always consult council before signing anything you are not familiar with and do not completely understand. —

An NDA is abbreviated as a Non Disclosure Agreement. They are typically sent by the seller (or seller’s broker) to a prospective buyer.

The idea is to give each party some comfort (these are always weighed more to the sellers interests, however). If the deal falls through, or never goes further, the seller needs some “insurance” that the buyer isn’t going to steal the information and duplicate the business (or improve their own similar business).

The NDA explains who the buyer can speak to about the business, this typically is their attorney, the seller, and the sellers broker. This allows the seller to restrict access to their employees and customers, in case they are not aware of the sale. It could cause harm to the sellers business.

If the buyer is caught in violation of the agreement, the seller can sue. Sellers can get “relief, claims, and damages” which is a fancy way of saying a good amount of court costs. Typically this is handled in arbitration without a lengthy trial, but that is spelled out in the NDA.

Just about every seller and seller’s broker will require an NDA to look at the business details. Once you sign this, they will send the business documents over. This is the only way to really make an assessment of what the business is doing, and you can start your real due-diligence. (Want some help with a web site purchase and due diligence? We can help, send us a note). This is also where you can finally see if the business is worth what they are asking.

What sections are important to read through in the NDA?

Well all of it of course! The items that are typically included are:

  • Name, location, what the business does/operates
  • The length of this agreement, can vary from months to years (3 years is typical)
  • Who each party is, name, address, etc
  • What information is covered, financials, contracts, trade secrets, suppliers, customers, employees
  • Where and when information is sent – typically this is all electronic, but some sellers might want to use physical documentation

As a buyer at this stage, you should determine how the seller is communicating with you. Are they open and easy to work with? Are they responding with actual answers and not vagueness? This will determine a great deal down the road when you are ready to close and begin the very involved process of the hand-over.