The NDA

The non-disclosure agreement (NDA) is the initial document in an M&A transaction, sometimes referred to as a confidentiality agreement (CA). Its purpose is to ensure confidentiality among buyers, establish terms of engagement, restrict disclosure to third parties, and outline other agreed-upon conditions.

Using an NDA is crucial for protecting sensitive information from being shared with unauthorized parties or used against the disclosing party, particularly in the case of private businesses. As a business owner or CEO considering selling your company, it is important to understand how and when to use an NDA to safeguard your interests.

There are situations where you might be approached by a potential buyer or competitor seeking collaboration, even if your business is not currently for sale. In such cases, having a basic understanding of NDAs, their key components, and their application is essential. Seeking legal advice is recommended when drafting or structuring an NDA.

ONE-WAY VS. MUTUAL NDAs

NDAs are commonly categorized as either one-way or mutual. In a one-way NDA, also known as a unilateral NDA, the receiving party is obligated to protect the disclosed confidential information. For instance, if a private equity group approaches you, you can require them to sign a one-way NDA, ensuring the protection of any confidential information you share while not being bound if they disclose confidential information to you. This type of NDA safeguards your information but not that of the other party.

On the other hand, if a competitor engages in discussions at a trade show, they may request a mutual NDA. In this scenario, both parties’ confidential information is protected under the NDA, covering any disclosures made by either side.

DEFINE CONFIDENTIAL INFORMATION

Confidential Information refers to sensitive or proprietary data that is intended to be kept secret and not disclosed to unauthorized individuals or entities. The definition of confidential information can vary depending on the specific circumstances, and it is crucial for a Non-Disclosure Agreement (NDA) to clearly outline what constitutes confidential information and what does not. It is essential not to sign an NDA that lacks this specific indication, as it could lead to ambiguity and potential disputes.

Typically, an NDA specifies that any information related to products, services, markets, customers, research, software, developments, inventions, designs, drawings, financials, and other similar items should be considered confidential. However, there may be exceptions to confidential information, such as information already known to the receiving party or information that is publicly available and can be proven as such.

In addition to defining confidential information, the NDA also includes other important clauses:

1. Purpose of disclosing confidential information: This section states the specific purpose for which the confidential information has been shared.
2. Returning or destroying confidential information: It outlines how the confidential information is to be returned or destroyed after the completion of the agreed-upon purpose or under specific circumstances.
3. Use of confidential information: This clause clarifies that the confidential information should only be used for the explicit purpose set forth in the agreement and not for any other purposes.
4. Enforceability of the entire agreement: In case any portion of the agreement is found to be void or unenforceable, this provision ensures that the remaining parts of the agreement remain valid and enforceable.
5. Ownership of confidential information: This section specifies which party retains ownership rights over the confidential information disclosed during the agreement.

“Never sign an NDA that does not specifically indicate what constitutes confidential information.”

The Confidential Information Memorandum (CIM)

The Confidential Information Memorandum (CIM), also known as the offering memorandum or pitch book, provides detailed information about the company being sold and highlights its long-term value. Many business owners underestimate the importance of professionally prepared marketing materials during an M&A transaction.

Having a comprehensive set of investment marketing materials has two significant benefits in the M&A process:

1. Speed: Well-prepared marketing materials that address potential buyer questions upfront reduce the need for individualized responses. This becomes crucial as the deal process progresses and time is of the essence. By anticipating buyers’ inquiries in advance, you facilitate quicker assessment of their interest levels, preventing wasted time for both parties.
2. Buyer perception: The appearance of professionalism greatly influences potential buyers. Investing in high-quality marketing materials enhances your business’s image and attracts serious buyers who are more likely to offer a higher valuation compared to organizations with amateurish materials.

“A well-crafted CIM can expedite the transaction process and lead to a more favorable valuation.”

WHY DO YOU NEED A CIM?

The CIM comes into play once a potential buyer signs the NDA. Its purpose is to help them understand your business and recognize the unique strategic investment opportunity it presents.

Components of a CIM may include:

• Executive summary
• Company History
• Sales process and/or manufacturing capabilities
• Management team structure
• Growth opportunities
• Competitive landscape or industry outlook
• Intellectual property overview and/or company assets
• High-level financials (historical data and projections if available)

Without a CIM, engaging with interested buyers would involve multiple conference calls, duplicated questions, and ongoing correspondence. However, with a well-prepared CIM, you can consolidate these interactions into one document. Buyers can review the CIM and swiftly determine their level of interest, either passing or progressing to the next stage, typically a conference call with the business owner. During this call, more in-depth discussions occur regarding the owner’s goals, valuation, and desired deal structure.

While buyers will still want to communicate directly, visit the company in person, meet the team, and tour the facilities, the CIM sets the foundation for all discussions and establishes transaction expectations. Sharing a CIM is the most efficient way to gauge a qualified buyer’s interest level.

SHOULD I HAVE A CIM EVEN IF I’M NOT ACTIVELY SELLING?

Having a Confidential Information Memorandum (CIM) prepared, even if you are not actively selling your business, can offer several advantages. It allows business owners to uncover and address any existing issues within their company before initiating the sale process. By creating a CIM, owners can view their business from a buyer’s perspective, identify potential challenges such as customer concentration or management expertise gaps, and find opportunities for improvement.

Additionally, a well-prepared CIM can also be useful when approaching commercial banks for loans. It serves as a comprehensive document that showcases the company’s strengths, operations, and financials, providing banks with valuable insights to assess creditworthiness. Moreover, in emergency situations like natural disasters, key personnel changes, or significant personal financial shifts, having a CIM readily available enables quick decision-making and communication.

However, it is essential to seek assistance rather than attempting to create a high-quality CIM alone. Several options are available, including hiring professional investment banks with expertise in building such materials, engaging an M&A consultant for more cost-effective support, or working closely with the CFO of the company. While each option has its benefits, ensuring that the necessary resources are committed to producing a professional CIM is crucial. Incomplete or amateur documentation may discourage potential buyers, resulting in undervaluation or lack of interest. Therefore, investing in a well-prepared CIM demonstrates seriousness in the selling process and yields long-term benefits.

“Don’t make the mistake of thinking you can prepare a high-quality CIM for your company without some sort of help.”