NDAs have become so commonplace in middle market transactions that many deal professionals have begun overlooking their importance. Despite their prevalence, NDAs are a tricky thing. The idea of “confidentiality” changes for each firm and for each business.
To help demystify this ambiguous document, we recently gathered several financial sponsors, intermediaries, and business owners to discuss their respective opinions on the NDA, common roadblocks, and negotiation tactics.
Your NDA is a Marketing Process
While technically a legal document, the NDA should be considered a marketing tool. “The NDA typically serves as the first point of interaction between an investor and the company,” as one attendee explained. “You want to make this first step as easy as possible.”
The NDA is a temperature gauge for what the rest of the negotiation process will be like; if the two parties cannot agree on an NDA, they will be unlikely to align on terms for the much longer, more complicated agreements further in the process. Like any marketing interaction, you want to think of the counterparty and preserve your company’s brand.
If the negotiation process becomes too difficult, it can be a major red flag. Lee Miklovic of Opus Capital Partners previously told us, “We will not move past the first stage of a deal if the banker or broker is not willing to accept changes to an NDA that is otherwise one-sided and not market-based.” Miklovic admitted to passing on as many as 25% of investment opportunities because of poorly-constructed NDAs or NDA-related negotiations.
Since the NDA is the first official encounter, it is important to treat it as such and to not overly complicate the first of many agreements. Considering the document from a marketing perspective can help remove some of the initial roadblocks.
You Need to Read the Entire Thing
While it is important to be accommodating in the negotiation, it is still necessary to take the document seriously. Lawsuits can emerge years after a NDA is signed, and ensuring you have obeyed all included clauses can protect you in case of litigation.
Even if the agreement seems like a boilerplate template, be sure to read it carefully. The last thing you want is to discover an unfavorable clause after you have executed the agreement.
One example of an overly-inclusive, one-sided clause that was discussed during the breakfast was:
“Neither party shall attempt to contact, deal with, profit from, or in any manner solicit any of the other party’s personnel, business contacts or associates, customers or vendors, or use the Confidential Information in a manner competitive, either directly or indirectly with the other party.”
Business Owners are Nervous
Some of the largest roadblocks in an NDA are rooted in the seller’s inexperience with the private capital markets. While they may be exceptional at running their company, their knowledge tends to wane for these transactions.Since they have spent much of their life building this business, they are afraid of making costly mistakes.
As a result, business owners tend to be more focused on every detail of the agreement, hoping to avoid any risk. Although intermediaries and financial sponsors have worked with hundreds of NDAs, many business owners will sign only one NDA in their life, making it extremely important.
Many business owners “paper up and lawyer up,” explained one Member. Since they are not sure about the normal procedures, they often feel the need to become excessively cautious and protective. It is the job of a good M&A advisor to help the business owner understand the real nature of the NDA and where emphasis should and should not be placed.
If the business owner is still nervous about the agreement, try to determine if there are other complicating factors. As one Member explained, “Most often, these businesses have complex family dynamics and they are just as worried about the secrecy of their family as the secrecy of their business. They don’t want their neighbors knowing what grandpa was up to.”
Fully understanding the business owner perspective can pave the way for a healthy negotiation process.