Best Practices for Mutual Confidentiality Agreements

By Michael J. McGregorPublished On: May 3, 2024

It should seem evident that preserving confidentiality in an M&A transaction is important to everyone involved, but particularly for the seller of a tire business. It’s surprising how many people I run across who don’t have mutual confidentiality agreements or non-disclosure agreements (NDAs) in place when talking with a buyer. I would think that not having your customers, employees or competitors knowing that a business is for sale would be the most important thing, followed by protecting all of your proprietary and confidential financial information. Not doing so recalls for me what one college professor of mine described as the definition of ignorance: “aggressive stupidity.”

There are some well-established market practices around transactions and the agreements that are used in them. It helps both sides to reach a reasonable final purchase agreement if they can agree to follow market practices or at least stay reasonably close to them as possible. A good practice is to not ask for off-market considerations, as long as the other party agrees to do the same. It’s important to set the right dynamic upfront and to try and be balanced. If one party accepts some off-market things early on in an NDA negotiation, then they may be pressured to do the same on more important items in the purchase agreement. Now don’t think buyers aren’t concerned with confidentiality. They don’t want any of their confidential information being disclosed by you also. But they view these agreements more from the perspective of not getting hemmed in.

Buyers are likely going to continue being in the business long after any sort of negotiation with you ends. They likely already know a lot about you, your customers, suppliers, buying prices and the like,or they can find out about these things just by talking to a few people. So don’t expect to hold them accountable for keeping publicly known information secret. And chances are they operate in – or have plans to operate in – many of the same market areas as you. They don’t want their right to do future business being restricted via any sort of agreement with you. Here are the typical clauses that we include in our mutual confidentiality agreements when we are representing a buyer looking to acquire a tire business. Note to sellers: understand that this is what I include when I’m on the other side of the table from you. If your particular buyer does not have these things in an NDA, ask them why?

Definition of confidential information;
Nondisclosure and use of confidential information;
Destruction of confidential information upon request;
Length of obligation;
No obligation to complete a transaction clause;
Non-solicitation of customers or employees clause;
No restriction on current or future business operations, and;
Miscellaneous provisions, including venue for disputes

For initial discussions, I try to keep the NDA as short as possible so the other party can easily read and sign without having an attorney review it. If a longer one is needed, that can always be generated later. In most purchase agreements, there are confidentiality clauses in there, as well. With regards to length of obligation, asking someone to keep information confidential indefinitely is not a reasonable request. NDAs have defined time periods and 18 months is the midpoint of what most all of the strategic and financial types we deal with are comfortable with. Some want 12 months and some are OK with 24 months. We’re good with anything in between.

Non-solicitation clauses in our NDA’s say that a party will not use the confidential information to knowingly go after the other party’s business or customers or to knowingly try to hire away employees that they meet or learn about as part of the discussions. Employees who apply on their own or through a general hiring solicitation are fair game. My opinion is if someone has a problem with non-solicitation, think twice about doing business with them. With regards to what jurisdiction or state laws should be followed, your “backyard” is not a neutral jurisdiction. That’s the principle behind using the state Delaware, which is a pro-business venue, as so many businesses do. Best practice is to not give one party the advantage over the other, so we use Delaware in our agreements, both nationally and with international clients. I always say that the likelihood of getting a deal done is inversely related to the amount of time and effort it takes to get an NDA signed. In other words, if it’s hard now with something as simple as an NDA, it won’t get easier later.

Michael McGregor, a FOCUS Managing Director, has over 15 years of experience advising on business transfers, capital raises, and management buyouts for middle market businesses. Prior to Joining FOCUS, Mr. McGregor was a Managing Director at Robertson & Foley, a regional Investment Bank based in Charlotte, NC. He led the firm’s entry into human services – a category that comprises Medicaid-reliant services such as foster care, mental health and MR/DD services for society’s most vulnerable populations. At Robertson & Foley, he successfully led recapitalizations of family-owned businesses to private equity ownership; steered several cycle-sensitive businesses through the 363 bankruptcy process; executed multiple buy side acquisition search engagements; and assisted a diverse number of sellers of privately held businesses. Mr. McGregor started his career in finance as a registered representative at Paine, Webber Jackson & Curtis and then took a 20-year detour into the automotive aftermarket. He joined the Firestone Tire & Rubber Company (later acquired by Bridgestone Tire) where he worked in a variety of positions including financial analysis, automotive product marketing, retail store management, regional marketing management for 350 western region stores, market research, database marketing management and strategic project management. Mr. McGregor ran tire store groups in Los Angeles and in Northern California for Bridgestone. Both were turnaround situations and Mr. McGregor broke them even within short order. He specialized in finding ways to improve gross profit margins while growing car count, unit sales and service sales. Mr. McGregor has been a founder or co-founder of 3 automotive-related businesses: a direct advertising & marketing firm in Northern California that specializes in promoting auto service; a retail chain of automotive accessories in Southern California and an innovative auto service start-up. As the self-billed “father of managed car care” he founded and launched AutoPact Car Service, the nation’s first “HMO for Car Care”. He sold the operations to AAA Carolinas in 2001. Mr. McGregor earned his Bachelor of Science degree in Business Administration /Finance from California State University at Long Beach. He received his M.B.A. from The University of Pennsylvania’s Wharton School of Business.