Confidentiality agreements are an essential part of any business sale. When selling a business, it is unavoidable that confidential information will pass between the parties for purposes such as due diligence or negotiations. With a confidentiality agreement, the parties handing over this information will be more secure because this information will not be wrongfully turned over to third parties that should not have it.
There are some common considerations that you should consider when negotiating and drafting a confidentiality agreement. These include whether the contract is one that binds both, or just one, party. You will also want to consider whether you will enter the agreement separately or make it part of the term sheet. You also want to discuss when you will sign this agreement.
Generally, you will want to sign this agreement as a stand-alone agreement, separate from others. You will also want to enter into a confidentiality agreement before disclosing any information in negotiations, which could occur before the term sheet is signed.
Confidentiality Agreement Pros and Cons
You should have a confidentiality agreement when you are selling your business and will be disclosing information to the other party to the transaction. Doing so can help you protect trade secrets or additional information that is confidential that you must hand over during the sales process.
Having this agreement also helps you define what both parties consider confidential information, what the parties expect from the other party. Finally, you should have a confidentiality agreement in place if you sell to a competitor who could use such information for their gain.
There are limitations to these agreements. Once the information is wrongfully disclosed, there is little that can be done to take that information back. Proving a breach of the contract may also end up being difficult. It is also challenging to ensure that the other party will not use any confidential information for their gain.
Despite this, the pros of having this agreement vastly outweigh the cons.
What Goes in a Confidentiality Agreement?
What is in a confidentiality agreement largely depends on the parties and the details of the transaction itself. There are some general provisions that you will find in nearly every contract, however.
Parties – the agreement should define who the parties are that are being bound by the contract. This could also end up including representatives, such as accountants and attorneys, that could end up being bound by the agreement.
Definition of Confidential Information – What counts as confidential information for this agreement?
Exceptions – What kinds of information would need to be disclosed but not necessarily be sensitive, such as publicly known information.
Permitted Uses – How are the parties allowed to use information that was disclosed during the sale? If information cannot be used outside the sale, then this needs to be stated.
Term – How long does this agreement last?
Returning/Destroying Confidential Information – What happens to all the information disclosed when the transaction is over? Does it get destroyed or returned? What are the details of how this gets done?
Remedies – What happens in case of a breach? Often cash is not enough to remedy a breach, and injunctive relief may be warranted.
Other – “no-clubbing,” no representations and warranties, and no solicitation, for example.
Ultimately you want to be sure that you have a well-written confidentiality agreement. It should define what type of information will be subject to the agreement, what each party does with this information, what happens in case of a breach, and what happens after the term has ended.
If you are selling your business, or are buying one, having an attorney draft your confidentiality agreement is the best way to be enforceable and successful. Contact Doida Crow Legal today for assistance with your confidentiality agreement.