4 December 2023: Non-Competes vs Non-Disclosure Agreements
Our last two blog posts were discussions about non-complete agreements. (You can find the first one here.) Judging by some of the comments or emails we subsequently received, some clarification is warranted as to the difference between non-compete agreements and non-disclosure agreements (“NDA”) and the different ways the two are used.
As we discussed previously (in Part 1, the link above and Part 2), as it pertains to what we do, a non-compete agreement is meant, in general, to prevent the seller of a business from competing with the business he or she just sold. This could apply to starting a new business offering the same products or services, buying into a competitor, sitting on a competitor’s board of directors (or advisors), consulting for a competitor, acquiring equity in a competitor or getting involved in any way with a competitor within a certain geographic range and for a certain amount of time post-closing.
But a non-compete is also pertinent to what we do to the extent that the management team of the business being sold is likewise restricted from competing with the target business. This is usually accomplished with an employment contract, an issue that is often overlooked by brokers and sellers – and is an important but seldom-considered aspect of managing the client’s expectations (MCE).
A non-compete agreement with employees is generally established at or near the date of hiring or elevation of the employee to a certain position in the business’ hierarchy or promotion to a level or section at which they would be privy to certain trade secrets, proprietary information or other competitive advantages their employer enjoys.
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Some companies also require that new employees sign an NDA if the employee has access to sensitive information about the company. For some companies, all employees will be required to sign the agreement; for others, only select departments or types of employees will be subject to the agreement.
But while elements of an NDA are often found in a non-compete, in our work NDAs are most often created at the time serious discussions begin between buyer and seller.
The NDA: What it Does
In the simplest of terms, a non-disclosure agreement is a legally binding contract that establishes a relationship between certain parties that requires a level of confidentiality on the part of one or more of such parties. The party or parties signing the agreement agree that any sensitive, generally defined information they may obtain will not be made available to others.
We refer to the documentation we use in our business as a “Confidentiality and Non-Disclosure Agreement”. An NDA may also be referred to simply as a confidentiality agreement.
Non-disclosure agreements are common for businesses entering into negotiations with other businesses. They allow the parties to share sensitive information without fear that it will end up in the hands of competitors and are common preconditions to any discussions between businesses about potential acquisitions or joint ventures. In our world, the language of the NDA forbids all involved from releasing information regarding any business processes or plans of the other party or parties.
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
The following components are generally part of any NDA:
- Participants – Every non-disclosure agreement must specifically designate who every party involved entails. The recipient of the sensitive information may be a specific person or group of individuals. But it might also be an entity; i.e., another specific company or any representative of the company.
- Definition of the Confidential Information – Though this is often extremely challenging to define, an NDA must state what information is considered to be confidential. Sellers can not simply assume that proprietary information will be understood by potential buyers. Because this is sometimes very difficult, in certain situations it may be easier to define what is not confidential. In such instances, a seller states that, except for specific items determined by the seller, all information shared with a buyer is defined as confidential.
NDAs are generally used to protect the following information:
- Customer Information – Depending on the size of the business in question, major customers, major customer contact information, customer preferences. In many cases, this may also include any direct communications by potential buyers with customers, at least prior to a certain point in the due diligence period.
- Vendor/Supplier Information – Including pricing, payment terms, special discounts, etc.
- Financial Information – Information relating to any customer, client or vendor as well as any information gleaned from the disclosure by seller to buyer of historical financial operating data such as profit/loss statements and tax returns.
- Intellectual Property – Such as patents, copyrights, trade secrets, technologies, and anything a company uses as a competitive advantage.
- Marketing Strategies – Such as processes, billing policies, pricing strategies or advertising techniques.
- Operating Information – Such as employee data, supplier information, any information related to payroll, or any aspect of internal costs required to operate the company.
The Bottom Line
The primary benefit of an NDA is that sensitive information regarding the businesses owned by our clients is kept secret. This can mean anything from research and development (R&D), to possible future patents, finances, potential customers, negotiations, and more – anything from the business’ pay scale or customer list to the secret sauce poured on one of those tasty burgers at the All-You-Can-Consume Palace down the street that are driving the incredible spike in Ozempic sales. Signing an NDA is a way to protect private information from becoming public.
NDAs also outline the consequences of disclosing prohibited information. If an NDA is breached by one party, the other party may seek court action to prevent any further disclosures and may sue the offending party for monetary damages.
When selling a business, an NDA is almost ALWAYS required, if for no other reason than to keep the possibility of a sale from becoming public knowledge prior to the deal being done.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@Wo*******************.com