If you are thinking about selling your business, you should be aware of the heightened need these days for protection of private information. I am constantly surprised by the amount of private information business owners are willing to supply to prospective purchasers of their business. Unsophisticated sellers often allow potential buyers access to highly confidential information, without ever considering that they may be giving up business secrets for free. As a seller, you should never allow anybody to access your confidential information without first having them sign a confidentiality agreement.
Prior to January 1, 2004, I advised business owners to have a confidentiality agreement signed before allowing anyone to see confidential information. That was good advice. However, with the introduction of the Personal Information Protection Act (the “Privacy Law”) in British Columbia, the rules have changed. It is now a legal requirement that you require prospective purchasers sign a confidentiality agreement. If you don’t, or if your confidentiality agreement does not comply with the Privacy Law, then you are breaking the law!
While a confidentiality agreement does not have to be a long document – it can fit on one or two pages – it cannot be prepared by just anyone. Don’t be fooled into thinking that you, your business broker or worse yet the prospective buyer can draft a legal agreement. Sophisticated buyers love sellers who try to be their own lawyer. Many times confidentiality agreements prepared by non-lawyers are unenforceable – either because they had the wrong parties or not all the parties sign, there was no consideration or simply because the wording was so vague that it didn’t provide any protection.
Here are some basic things to keep in mind when reviewing a confidentiality agreement:
- Ensure the privacy agreement complies with the Privacy Law;
- Consider who should sign the confidentiality agreement, clearly the prospective purchaser, but what about senior officers of the buyer?;
- Ensure the confidentiality agreement is enforceable, meaning that there is valid “consideration” for the covenant not to disclose confidential information;
- Ensure the confidentiality agreement covers non-disclosure, but also includes a requirement not to use the confidential information for the benefit of the party receiving it; and
- Ensure the confidentiality agreement prohibits the prospective purchaser from soliciting your employees.
A strong confidentiality agreement will contain these and additional provisions. If you are the seller, don’t rely on a confidentiality agreement prepared by the prospective buyer. You own the confidential information, so you should remain in control.
You should not be afraid to require a buyer to sign a strongly worded confidentiality agreement. While there is always some reticence on sellers not to “scare the buyer away”, you should always remember that not all prospective buyers actually buy. A sophisticated buyer expects a confidentiality agreement and will wonder about your business acumen if you do not provide a sophisticated confidentiality agreement to them to sign. You only have one chance to protect your information – once you have disclosed without protection it’s too late.
In addition to the above, there are many other issues to consider when dealing with the protection of your confidential information. Don’t make the common mistake of not understanding the importance of privacy in business succession planning.