The Non-Disclosure Agreement (NDA)

Having been engaged in the M&A sector of the buildings services industry for many years, and before that as a building services contractor, I have seen my share of legal documents. I am not an attorney, but it doesn’t take long, working with attorneys and my M&A colleagues in GPA, to gain an appreciation for all of the documentation that is necessary for the M&A process. One such document is the Non-Disclosure Agreement (NDA). It is usually the first document that the seller and a prospective buyer will see, and without which there is mutual agreement, the acquisition process will end before it starts.

Why is the NDA important? It is important because it provides a sense of security for each party that the sensitive and secret consideration that is being undertaken will remain secret. Shareholders of a company that is considering the divestiture of their shares, whether partial or all, do not want others (customers, employees, competitors) to know that divestiture is being considered. Employees may unknowingly be fearful at the thought of the company for which they are employed being acquired by another group. Customers too may have concerns about their property and how a new owner will carry out the responsibilities for which there is an agreement in place. Competitors may seize upon this information, trying to use it to gain a foothold in the marketplace. Its importance to the parties may simply be that they want the process to go forward quietly until the time is right for the information to be made available. It is important, in a situation where the acquisition of a company is being considered, for the prospective buyer too. It is quite common for the NDA to be mutual, agreed to by a prospective seller and a prospective buyer.

The NDA comes in all sizes and shapes. It may be complicated, or it may be quite simple. It should have a reasonable time limitation and it should be specific about what is not to be disclosed, as well as any exceptions. The NDA is a business tool and is used in all business sectors and not necessarily applicable for M&A projects only, but for any business activity in which the circumstances are deemed to be private and confidential.

Those that agree to the NDA by means of their signature have an obligation to honor that commitment. If not honored, the consequence may be nothing more than a tarnished reputation for that group or individual that violated the agreement, or it may result in a legal battle that will probably be destructive for each party. There is nothing gained by anyone if the NDA is not honored, but there may be much to gain by all if honored and the acquisition process is allowed to play out.

This is the first in a series of Stay Tuned articles provided by Gary Penrod and Associates, Inc (GPA) that will deal with the M&A process in the building services industry. Future topics that will be discussed include valuation, valuation influences, buyer qualification, the softer side of acquisition and more. STAY TUNED.

 I welcome your comment and questions and I can be contacted at 843 645 1937 / 843 290 7534 (cell), or [email protected]. Christi Rohmer, CPA, and a GPA senior associate can be reached at 210 572 4447, or [email protected]