At the early stages of buying or selling a business, there are certain documents that are required even before you sign a sale agreement. One such document is a confidentiality agreement (which is often referred to as a non-disclosure agreement).
Why is a confidentiality agreement important?
After years of building a business, often an amass of information, including trade secrets, know-how, contracts, marketing and finance information and intellectual property would be created. This information has intrinsic value, is important to the seller and would form part of the sale of the business. The buyer might also have valuable information such as financial information, sales data or personal details which they need to disclose during the transaction, to obtain consent from the landlord to the lease or by a franchisor, if buying a franchised business. If someone used this information, by providing it to a competitor or using inside know how to compete, it could result in significant harm, loss of revenue and positioning to the business.
To show that someone breached the obligation of confidentiality you need to prove that the information is confidential and if used incorrectly would cause loss or damage. A confidentiality agreement can be used to protect the information that is being disclosed during a transaction by identifying what information is confidential and providing obligations around how to use that information. The confidentiality agreement should be a mutual written agreement with both parties agreeing not to disclose any information that the other party has provided to them.
What is confidential information?
Confidential information is anything that possess the quality of confidence. Given each business might have a different concept regarding what they consider to be confidential information, the confidentiality agreement should identify what information is regarded as confidential.
This information would typically include financial figures; marketing information; trade secrets; intellectual property details; details of the assets; clients; supply and employee lists; pricing and costing information and any other information that is specific to the business and regarded as confidential.
Measures to control that information.
To protect confidential information, you need to have control over it. The agreement should include measures aiming to control that information, by indicating that the information can only be used for a particular purpose; by particular people and used in a particular way.
- Purpose: The agreement should provide the purpose for providing the information to limit the scope of situations where that information can be used. If the information is disclosed for the sale transaction, and the transaction does not proceed, each party would be prevented from using the confidential information that was provided to them for any other purpose, unless additional approval from the person that disclosed that information was first obtained. If the information was used without approval, they would be in breach of the confidentiality agreement.
- Disclosure to whom: The agreement can also restrict disclosure of the information to people that need to know the information, so that only those who are assisting with the transaction, including the accountant, lawyer, financial advisor, bank and staff would have access to the information. If this detail is not provided in the agreement and the information was disclosed to other people, there would be a breach of the agreement.
Specifying who should access the information protects both parties. If disclosure was made for example, to employees of the business it might prompt staff to resign should they be uncomfortable working with new owners. It also stops the transaction being disclosed to other people who might have an interest in the business or activities of the buyer or the seller.
- Controlling the information after it has been given: It is also good practice to require each party to have systems for the protection of confidential information. For instance, you might want to require that once the information has been received, it should be stored securely, be password-protected, and not handled in public places.
Exclusions to the obligation of confidentiality
Not all confidential information can be protected. If any information is already public domain and can be found through public searches, the information has already lost its confidential nature. This means you will not be restricted from disclosing information about the other party or their business if you have found that information in newspaper articles, or public searches or where anyone else could have found that information.
Information cannot be regarded as confidential, if you are already aware of that information before entering into the agreement. Information also cannot be regarded as confidential if you are required by law to disclose it.
What happens at the end of the agreement
You’ll need to consider how long the agreement should be in place for. Sometimes the agreement will end once it is replaced by a sale agreement or the agreement might end on a particular date or by a trigger, such as once the parties agree in writing not to proceed with the transaction. Despite the agreement ending, the obligation to keep the other party’s information confidential might endure for a period of one or two years after the agreement has ended.
The agreement should also include provisions indicating what will happen to the information that the other party has been provided, once the agreement ends. Typically, the information is either returned to the party that owns it or is destroyed.
It‘s essential to enter into a confidentiality agreement to protect both parties before any information is disclosed.
The agreement should be mutual and in writing.
The agreement would typically include:
o What is regarded by the parties to be confidential information.
o For what purpose has the information been disclosed.
o How information relating to the business, and the transaction, should be used.
o Who has access to the information.
o How should the information be kept and stored.
o What happens to the obligation of confidence after the agreement ends – will it continue for a certain period.
o What happens to the information after the agreement ends – will the information be returned to the owner of that information or be destroyed.
About the Author:
This extract has been taken from the book, ‘Entrepreneur Know How – Mindset and Winning Steps for Buying a Business,’ written by Sharon Robson (Available through Amazon). Sharon is also the principal lawyer, director and founder of the boutique law firm, Antler Legal – a corporate commercial legal practice in Sydney, Australia. She has played a key role in facilitating, advising and negotiating many business transactions on behalf of her clients. Sharon is also a speaker, marketer and business owner. She is passionate about mindset and empowering people through education.