Hey everyone, thank you for joining me today for a podcast on a key aspect of the M&A process that every Seller must go through – The NDA or Confidentiality Agreement. My name is Madhur Duggar. If after listening to this podcast you wish to learn more about the middle market M&A world or listen in to more of these types of podcasts contact me over LinkedIn. Let’s get started.

The first document any Seller signs when starting their relationship with a potential advisor is typically a Seller Confidentiality Agreement. This podcast discusses some of the key aspects of this document that Sellers should expect. 

A Seller Confidentiality Agreement is generally signed after an Advisor has made initial contact with the Seller and there has been some indication that the Seller is open to having an initial exploratory discussion about what it would take to sell their firm.

Its main purpose is to ensure that information that the Seller shares with the advisor remains confidential and is accurate to best of the Seller’s knowledge and that the Seller will continue to work through the advisor with any buyer prospect that the advisor introduces.  

Although the document is quite straight forward, for first time sellers who have yet to build a rapport with the advisor it can give them pause and they may get concerned that by signing the document they are committing to something they may come to regret later. In this podcast, I wish to make the point that a Seller NDA is there to protect the interest of the Seller. In most cases it serves as a starting point to have those initial conversations with an advisor to decide whether now is the time to list your firm.

These days, I come across young entrepreneurs in the growth equity space who have been operating their firm for a bit, have an exciting product, a great business model and have even started to generate revenues, but for various reasons they are now getting curious about selling their firm and moving on. The reasons can be many. Maybe they are having trouble with growing their business. May be the technology landscape being as competitive as it is, they have some doubt as to whether they have a winning technology. Maybe, they have a winning technology but they need to partner with a larger strategic partner to build scale and become part of a more complete service offering. Maybe, they are serial entrepreneurs who loved the creative process of ideating and germinating a business but don’t love the day-to-day logistical headaches that come with operating a business.     

Many such entrepreneurs are not familiar with a typical M&A process and so when the see a Confidentiality Agreement their instinct can be to freeze. Hopefully this podcast can clarify for them what the purpose of the NDA is and to show them that an NDA is really in their best interest. 

For this podcast, I am going to focus on three key aspects of the NDA. The first is confidentiality around information that the Seller shares with the Advisor. The second is accuracy of information the Seller provides to the Advisor and the third is a requirement that the Seller work with the advisor on any potential purchasers the advisor brings to the Seller. 

Confidentiality

A typical confidentiality clause in an NDA should require that the Advisor not disclose the name of the Seller or any Information about the Seller to any person other than responsible parties of the advisor and third parties approved by the Seller.

Sometimes young entrepreneurs fresh from the informal and exciting fundraising process of seed financing will say they are very happy to market their firm as widely as possible. It may seem to them that confidentiality is not necessary. The advice I always give them is to think of what impact this may have on their own stakeholders. Have they discussed this possibility with their other co-founders, have they discussed this with their Board or their C-suite? How are firm employees likely to react if they hear that their firm is up for sale. Is there a risk key employees may leave? What impact will this have on valuation if a buyer finds that the firm has been losing headcount instead of showing growth? 

Experienced advisors in our space know how to run tight processes through which they cast a wide net for buyers while keeping the whole process confidential. They only share information with buyers that is necessary to share, they let buyers know the information they share should be treated as confidential and they typically require potential buyers to sign confidentiality agreements prior to sharing any specific information on the firm. As a seller you want that. 

Accuracy of information

An NDA will also typically have language that states that the information a Seller provides the advisor is true and complete to the best of the Seller’s knowledge. This is obviously to protect the Advisor from a situation where they lose credibility with Buyers for sharing inaccurate information with them. But also importantly, this is also very important for the Seller to establish credibility with the Buyer. Buyers who find out late in the process of material inaccuracies can lose faith in the process and back away from a transaction.

When dealing with early-stage companies, it is not uncommon for Sellers to share with us some basic marketing material on the firm. The reality of course is that Buyers need much more than that. An experienced Advisor should be able to work with a Seller and lay out the key topics that Seller documents should contain with regards to firm financials, contracts, client base, IP etc. Covering these topics may take time, but it will save time later and it will build trust with the Buyer which will help with Valuation and avoid roadblocks.

A seller NDA will typically have language requiring the Seller to work through the advisor with any buyer prospects that the advisor has introduced.

While this may seem like language that is solely for the benefit of the advisor, it is rarely to the benefit of the Seller to work directly with the Buyer. As a Seller you want to have an experienced advisor in the middle to field buyer questions. This will save you time and energy when you are preparing marketing materials and minimize the time you need to spend fielding questions. You can go back to doing what you do best – running your firm. In addition, it will incentivize the advisor to cast the widest net possible to find Buyers for you. The wider the net, the greater the competition for your assets and the better the valuation.

So to summarize, the main purpose of a Seller NDA is to ensure that information that the Seller shares with the advisor remains confidential. It is accurate to the best of the Seller’s knowledge and that the Seller will continue to work through the advisor with any buyer prospect that the advisor introduces. All these aspects of the NDA are in the interests of the Seller. Confidentiality allows a Seller to remain in control of their narrative. Accuracy of information establishes credibility with the Buyers and avoids last minute Buyer withdrawals. And agreeing to work through your advisor with Buyers helps to create the widest net of Buyers and therefore the best valuation for the firm.

And this brings us to the end of this podcast. I hope you found it useful. As always, I am happy to answer any questions with regards to choosing the right process for you as you think of strategic options for your firm. Feel free to reach out to me over LinkedIn. Looking forward to connecting with you.