Confidentiality Agreements

Originally Published by Jay Polimeno on Aug 3rd, 2007

Why are some prospective Buyers uncomfortable about signing Confidentiality Agreements?  Lately I have been seeing a trend resulting in almost 20% of prospective buyers falling off the face of the earth after I have responded to their business inquiry by sending them a Confidentiality Agreement to sign.  In my response to their inquiry, I explain that the listing is confidential and that I will require a completed and signed Confidentiality Agreement prior to releasing the listing package and financials.  Along with my response, I send a copy of the Confidentiality Agreement designating the business that they are interested in, and personalized with their name.  The only information I ask them to share with me is their mailing address, telephone numbers, and e-mail address.  At this point I have not requested a personal financial statement or any other in depth information about the prospective buyer.  Why then do I not receive a signed agreement back 20% of the time, and also not receive a response when I try to follow up on my initial contact with them?  Maybe a Confidentiality Agreement is more intimidating to a prospective buyer than those of us in the business care to acknowledge.  For those of you who may be intimidated by this necessary document, let me dissect the contents of a Confidentiality Agreement as straightforwardly as I can.

A Confidentiality Agreement protects the Seller of a business by legally ensuring that the sensitive, proprietary, and confidential information relative to the sale of his business is kept in the strictest confidence by a prospective buyer.  Language in the document will customarily state that:

    • the information provided by the Seller will not be disclosed to another party unless that party is involved in the sale.
    • all negotiations will be handled directly through the listing Broker and that no contact with the Seller or related entities to the business is permitted without direct authorization of the Broker.
    • the Buyer will not take unfair advantage of any of the confidential information for the Buyer’s own benefit.
    • the information is provided by the Seller and is not verified in any way by the Broker.
    • prior to finalizing a purchase, it is the responsibility of the Buyer to perform due diligence and make an independent verfication of all information.
    • Buyer agrees to provide a resume and financial statement, if requested, and that this information wil be held in confidence and will only be used for the purpose of Seller extending credit to Buyer.
    • Buyer warrants that he has the legal and expressed authority to enter into this agreement and guarantees the performance of this agreement.
    • Buyer understands that a violation of this agreement could subject Buyer to legal action by Broker and/or Seller.

Simply stated, a Seller is willing to share the intricacies and intimacies of his business with a prospective Buyer as long as the Buyer agrees to keep the information to himself, and not use it to gain an unfair advantage.  It is a legally binding contract, but that in itself should not be intimidating, as long as the prospective Buyer understands that the information is confidential.

Take the time to read through a Confidentiality Agreement prior to signing one, just to make sure that it contains the same type of content that I’ve detailed above, and that it does not obligate you to anything that you are uncomfortable with.  Chances are that if you are dealing with a Certified Business Intermediary, the Confidentiality Agreement will be straightforward and contain only appropriate information.  Sign it with confidence to gain access to the information necessary for a succesful search for a new business opportunity.