Don't make this NDA mistake
Why you should 'go easy' when negotiating the NDA with your potential buyers.
There's a major risk regarding NDAs for company owners exploring a sale, but it's not what you think...
Negotiating the NDA is the first time you and the buyer will grapple over terms.
Many sellers negotiate it like their life depends on it, and that's a mistake.
This might be to 'set the tone' in the deal and look strong, or out of genuine fear of their information being leaked. Often it's just over-zealous lawyers getting out over their skis.
In any case, they come across as aggressive, unreasonable and difficult to work with. That can kill the buyer's appetite, or even kill the deal, before it has even started.
What's an NDA?
Let's take a step back... What's an NDA? Why and when do you need one if you are selling your company?
When you start getting into more serious and substantive discussions with a potential buyer, you will start to share confidential information with them.
That will get progressively deeper and deeper – starting off with just high-level financials, and going into full financials, customer contracts and pricing, employee contracts, the code base and so on. Due diligence is brutal, and no stone is left unturned.
To make sure this information isn't shared by the buyer (or used for anything other than the deal), you will ask them to sign a confidentiality agreement, or Non Disclosure Agreement.
It's a necessary step in the process, and the buyer will be expecting it.
But sellers trip themselves up but negotiating this document way too aggressively.
Because the NDA is agreed surprisingly early in your courtship – just as you are starting to share some real details with the buyer – it's very easy to scare them off before you've got them really keen. Or at best, hold up the process arguing about minute details.
I've seen many buyers suddenly lose interest when a buyer sends back an NDA covered in edits, especially if most of these are ununusal and unnecessary. They think: "If a simple NDA is this hard to agree, how are we ever going to get the deal done?"
The NDA is important, and it should give you adequate protection. But often the small details that you fight over count far less than setting the right tone with the buyer.
Practical Tips
So how should you approach getting an NDA in place?
- Ask the buyer if they have a standard NDA that they would like to use. Working on their terms will help speed things up and reduce the amount of work they have to do internally to get it signed. If not, ask your lawyers to prepare a simple and balanced draft.
- Ask your lawyer to sure that the main points are covered, but don't let them overreach. Common issues are asking for unusually wide protections, for long confidentiality periods or stopping them sharing information internally through the deal. This makes you look inexperienced and naive.
- If they want sensible edits, just agree to them.
Your goal is to get the document signed as quickly as possible, so you can move the deal forward to the next phase ASAP.