Consider this scenario

Joe has successfully built his software company from the ground up and is now thinking of retiring to a beautiful coast in Italy. Word of this gets around and Joe receives calls from people asking him to sell his company. Joe decides that the time is right to sell the company and starts exploring various options. He seeks advice from professionals to help find him find a suitable buyer. After a couple weeks, he gets many interested buyers and asks them to sign a non-disclosure agreement (NDA) because he heard from others that it is important. An NDA is a contract often made by parties when evaluating a potential business deal whereby they agree not to disclose sensitive or confidential information about the seller.

What do most people do in Joe’s situation?

Once a prospective buyer returns a signed NDA, many sellers make the unfortunate mistake of handing over full financial statements and other valuable business information without seeking any further advice from their business and legal advisors.

What could possibly go wrong?

Sellers often make the error of thinking that an NDA will protect them. Very few people appreciate that a company’s full financial statements often contain valuable information (i.e. profit margins, financial leverage, and money spent on research and development) that competitors can use to undercut and hurt other businesses even with an NDA in place. While it may be the case that having an NDA is better than not having one, in reality it is often difficult to prove that a prospective buyer has acted contrary to the agreement and accordingly, difficult to enforce the NDA. It may even be that a prospective buyer could be a competitor in disguise.

What you should do instead

If you are thinking of selling your company, you should call your accountant and ask him/her to prepare a condensed financial statement of your company. A condensed financial statement is a summary of the full financial statements that provides an overview of a company’s financial performance without a line-by-line breakdown. Meaning, instead of listing out the expenses by each individual item (i.e. materials & supplies, R&D, and equipment), a condensed financial statement would provide a single aggregated expense line, thus, limiting the amount of sensitive information included. You should provide this condensed financial statement to prospective buyers upon signing a non-disclosure agreement instead of the full financial statement.

Next, for added protection, you should ask prospective buyers for a non-refundable deposit upon submitting a letter of intent. A letter of intent often contains conditions which prospective buyers can rely on to walk away from the deal and get a refund of their deposit. Having a non-refundable deposit means the seller gets to keep the deposit regardless of the conditions contained in the letter of intent if the prospective buyer walks away. Also, asking for a non-refundable deposit (the amount would depend on the company’s valuation so as not to discourage people completely from submitting a letter of intent but $20,000 to $50,000 could be reasonable) could attract prospective buyers who are serious and discourage those who are submitting a letter of intent only to acquire valuable information about your company. Having a non-refundable deposit will encourage any prospective buyer to think long and hard before submitting a letter of intent.

Therefore, when you are thinking of selling your business, keeping these things in mind can save you a lot of trouble later on.

This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Hugues today.  613-747-2459 ext.304,