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Signing Non-Disclosure Agreements

February 29, 2012

A fair number of business Buyers have written us about whether Non-Disclosure Agreements (NDA), or Confidentiality Agreements are necessary.

In our view:  Absolutely, without question, no doubt!

The issue is that it protects both the Seller AND you, the Buyer, by not arbitrarily letting the World know the business is for sale.  That is left to be done at a precise time, with strategic planning and an understanding of the potential reactions of all of the personalities, involved.

We had a situation recently that actually demonstrates the problem.  A Seller came to us to list his Restaurant.  It had been previously listed with a Commercial Real Estate Broker, who did not actually broker businesses.  But because the Seller had both a Business and Real Estate, he thought this was the way to go.

We know the Commercial Broker, and he is excellent at Real Estate.  We are also a Real Estate Brokerage, but more because of the legal requirements to be licensed in that way, in order to sell the Real Estate that accompanies some businesses.  If we have a building to sell, we refer it to a competent Broker that specializes in that segment of the business.  He should have done the same, when selling the Restaurant.  To have a specialist is critical!  You would not go to your next door neighbor – a Gynecologist – if you wanted to have your tonsils taken out, would you?

When advertising a business, the vast majority are described in general terms and for the general vicinity, but not the specifics that would allow the public to identify that particular business.  But the Commercial Real Estate Broker did what he normally does with any property, and placed an ad in the local paper, as well as in various databases used by Buyers and Investors to prospect for property…including the address and several pictures.  The problem is that the Customers saw the ad and drifted away; Employees began to give their notice as they found alternative jobs, figuring they would lose theirs at the Restaurant when it sold; and the Seller’s Suppliers suddenly got very tough on terms, not wanting to get stuck with unpaid bills, once the place sold.  It became a nightmare, for the Seller.  What had been a previously, profitable business, had become a terrific facility with very little Revenue, and no profit.

Another situation was even worse, and also occurred with a Restaurant.  The Seller had gone to a Residential Real Estate Agent she knew on a social basis.  That Agent actually put a “For Sale” sign on the grassy area, directly in front of the business!  The Agent happened to put the sign up when the Owner was having surgery; therefore, she was not personally at the business for two days; and knowing she was having surgery, her employees were hesitant to call her.  It was a disaster!

As a Buyer, when you walk into a place of business that you are looking to purchase, you need to be aware that you should not talk to the Customers, the Employees, the Vendors, the Landlord or even the Owner him/herself in any way that hints that you are looking to buy!  An NDA requires your consent to those terms.  If you are in a Restaurant, eat a meal.  If you are in a Gas Station, buy some gas and buy a soda.  If you are in Nightclub, have a drink and a dance.  If you want a tour, arrange it with the Seller or his Broker, but under the term of the NDA.

Your attempt to look at and ultimately attempt to purchase a business should not endanger the Seller’s ability to continue to earn a living and protect his/her investment.  Moreover, if you let on that you are looking to buy, and then actually do it, you could ultimately harm your own ability to maximize the value of the business, by being careless in exposing the event, before the right time is at hand.

Ultimately, you will also be provided with Tax Returns, Leases and other confidential information about the business.  The NDA requires your confidentiality with these documents.  You can share them with your Lender, your Accountant and your Attorney, but not with anyone that is not directly involved in your purchasing process.  In many cases, the NDA requires you to return any such documents within a very short period of time, should you decide not to buy the business.

READ THE NDA CAREFULLY!  There are some instances where you can be required to agree to other terms that are simply slipped in, with the hope that you will not read the Agreement carefully.  One of these is to appoint the Broker that issues the NDA as your “Buyer Broker”; this could mean that you are stuck with that Broker, for any subsequent deal you try to make, and this can result in you paying him/her for that supposed representation.  Others will try to put in terminology that means you owe them a fee, if you buy even that business.

Both of these are unusual cases; but you should never sign any agreement you do not completely understand.  And if it is an NDA, it should only stipulate terms for that purpose.  If you want to name a Buyer Broker, that really should be executed under a completely separate agreement.  If you do not understand the NDA, if they put in other terms, DO NOT SIGN IT!  Seek the advice of an Attorney.  Or walk away, completely.

It is not unethical, illegal or unreasonable for a Broker or a Seller to require an NDA.  We are amazed at the number of Buyers that ask, in their initial calls to us:  “What business is it?”  “What is the address?”  “Can you fax or e-mail the Tax Returns?”  And at the same time, they refuse to even give us their names and telephone numbers!    We are under no obligation to send you personal, confidential information without some semblance of information about you.  Some Brokers require Personal Financial Statements from the Buyers, prior to giving them sensitive information about the business.  This is to ensure that the Broker knows you the financial ability to buy that business.  This is also not unethical or illegal.

What IS unethical or unreasonable is for the Broker or Seller to demand a deposit, in order for you to get detailed information.  We know of one Broker that would freely give out an abstract of financial information, but to get Tax Returns, he demanded the Buyer provide him with a Letter of Intent and a $50,000 deposit!  We knew one family doing the Buying personally, through this Broker.  The family was foreign-born, with somewhat limited English proficiency; as a consequence, they were very uncertain of their position and very timid.

They requested our help when the Tax Returns did not reflect the same information as was provided on the previous financial statements, and the Broker tried to withhold the deposit on the basis of the LOI.  …Let’s just say we walked into the Broker’s offices and prevailed upon him to release the funds.  We have done that only once, and never want to do it again!

An NDA should not intimidate you; it is not an out of line demand.  But know what you are signing!

When in doubt, see an Attorney.

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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