A question about non-disclosure and non-compete agreements
Here at Midascode Ltd we get a lot of questions – and one of the most regular is about the use of non-disclosure and non-compete agreements.
Going forward, we intend to feature the most regular questions in the Questions Category of our blog.
Please Note: These replies should not be considered legal or financial advice – individual circumstance will vary and you should always take independent legal and financial (including Tax) advice before entering into any contract or agreement.
This featured question is from Mr M (who wishes to remain anonymous)
I’m in a quandary. An investor who wants to buy my website business contacted me. He’s asking me to draw up non-disclosure and non-compete agreements so we can proceed.
» I have no idea what information to reveal and how soon. Do I attempt to scare him off and if he’s not, then show him everything? Do I show him everything and hope that he doesn’t take/tell my behind-the-scenes ideas/strategies?
» I have no idea if ANY NDA/NC contracts will really protect me.
» It feels like a stranger just came up to me and asked me to have sex with no foreplay, and I have no idea how to proceed.
Any thoughts /ideas/ wisdom that you have would be greatly appreciated.
Dear Mr M
Thank you for your question – but I have to say firstly that I doubt very much that anything I am going to say here could be really considered “wisdom” – it is more my own take on selling websites and of course my experience.
Quickly – my recommendations would be:
1) You really think you need to have a chat with an Attorney / Lawyer who specialises in Mergers and Acquisitions – ideally someone who has also dealt with website sales. If you don’t already have someone on board like that – then Perhaps your CPA / accountant can suggest someone?
2) Properly drafted NDA/NC are enforceable – so I would not worry too much about that provided you have got them correctly drafted – hence the Attorney requirement.
3) If you do meet with this potential buyer, it may be an idea to have your Attorney with you. You will also prior to entering into formal negotiations and due diligence have to sign a HOA (Heads of Agreement) – that will be the “rough basis” on which the SALE contract will be drafted (subject to due diligence)
Now if I was the buyer of your business the BIG QUESTION is always – how easy or difficult would it be to replicate your business model? If it is easy to set up a competing business then the lower the value of your business, even if it is making shed-loads of money!
I shall assume that in your case, there is some barrier to entry – even if it is only that you have some sort of “first movers advantage”. Anyone who wants to buy your business is doing so because they believe they can get even more value / money out of it that you, so I am guessing that at present, the buyer sees a lot of FUTURE value, hence why they approached you now.
I can see that you are looking for some of that FUTURE VALUE, but my guess is the BUYER will not give you that kind of valuation in cash, but will tie you into getting that value out at some future date, assuming the business reaches its potential.
The Non-compete is essential, simply because you will have to reveal a lot of intimate data about your business and your strategies in order to get a firm offer. The buyers and their team of professional advisors will ask you questions you could never even imagine in my experience. There is no point in hiding anything because sooner or later as the sale progresses you will need to REVEAL even more information and I dare say give some warranties about what you have claimed / said. (i.e. they can claim back from you the seller, if at a later date they can prove that something you said was not true or that you neglected to let them have appropriate information).
This process is usually referred to as DISCLOSURES – and if you leave anything out, there will be problems later. When I sold a business recently, I ended up disclosing things that may not really have needed to be disclosed, on the basis, that if I disclose it now, the buyers cannot at a later date come back and say I failed to tell them.
In the DUE DILIGENCE – You will be asked for details of any current or past litigation you may have been involved in? Details of bad debts, Details of employee’s contracts, details of sub-contractors contracts – the list will go on and on. (It is not really a big deal any of these, just pointing it out, so you have some idea of what to expect)
In my experience, you will get more money for the business, the better and cleaner your systems are. Basically everything about your business should be documented. Imagine you got run over by a bus tomorrow – and someone had to pick up the pieces after you had gone, would they be able to that? (Or are there something’s in Mr M’s head that only Mr M knows about)
If you do not have all of this covered at present – then I would suggest you put sometime aside ASAP to concentrate on it. One day, when you do eventually sell – you will need this documentation and of course it will give the potential buyers more confidence in your business if they can see you have this information.
Finally, selling a company costs you money – and it will often cost you money, even if you don’t sell. When I sold my company, the professional fees exceeded $60,000 – and in the UK the owner / shareholder personally pays this money, not the company.
I hope this helps answer some of your questions but do feel free to ask further if you need to, either now or in the future. My main advice remains to get a Business Attorney / Lawyer onboard and advising ASAP.
BARRY DUNLOP AND MIDASCODE LTD DO NOT GIVE LEGAL OPINIONS
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