Keeping it Confidential in Business Deals

Upon receiving an indication of interest from a potential buyer one of the first things that a company should do is put in place a confidentiality letter (sometimes called a non disclosure agreement).

 

A confidentiality letter is a legally binding document signed by both parties. It aims to ensure that the potential buyer does not disclose any information they are provided with as a result of negotiations and initial due diligence.

For a variety of reasons the owners of many businesses thinking of selling will want to keep confidential even the fact that they are considering selling and that preliminary negotiations are taking place.

 

Confidentiality letters are commonplace. If a potential buyer refuses to sign one this should set alarm bells ringing. The signing of such an agreement is an important act of good faith and refusal could suggest that the buyer is not really interested in purchasing the business but rather just having a look at the seller’s customer lists, contracts and the like.

 

There is a good chance that a potential buyer may be in the same industry sector as the seller. Sellers therefore need to be acutely aware of competitors undertaking such ‘fishing trips’.

In reality confidentiality agreements are difficult to enforce and buyers should not let themselves be taken in by a belief that just because they have signed such an agreement they are protected completely. They should also protect themselves by limiting and monitoring the information that is provided to a potential buyer. Enforcing a confidentiality agreement will involve recourse to the courts and exposure to the inherent uncertainty that is involved in all litigation.

 

 

 

Confidential and sensitive information should therefore only be released after careful thought is given to the implications of releasing the information and on the basis of a firm belief that the buyer is genuine.

 

Confidentiality agreements do, however, still have a strong moral force and buyers who breach such agreements soon find that they gain a reputation within their industry and among professional advisers.

 

Many of those selling their business will be doing it for the first (and only) time and it is therefore wise to consult with professional advisers at an early stage.

 

* James Wharton is a solicitor in the business and company law team at BHP Law. For more information, contact him on (01325) 466794.