An NDA is a vital part of a deal. According to Mark Khavkin, CFO at Pantheon Platform, an NDA is fundamental because it establishes trust between the buyer and the seller. It will determine how the parties will work together moving forward.
"If you can't negotiate an NDA, you probably won't be able to negotiate a 300-page closing binder." - Mark Khavkin.
As mentioned previously, negotiating the NDA sets the tone for the whole deal. How you conduct the negotiations will give the other party a preview of what it is like working with you on a go-forward basis.
This is why you need to get into the mindset of being accommodating and into a problem-solving mode if you want to have a successful NDA, which will lead to a successful closing. Trust is the most critical element of negotiating an NDA, and the last thing you want to do is win the negotiations but lose the deal entirely.
Before you enter into NDA negotiating, Mark's rule of thumb is to identify the information discoverable through outside forces. These are the things accessible through interviews, sales pitch decks, clients, prospects, analysts, former employees, website, etc. Restrictions should not bind them because you discovered this outside the NDA.
Lastly, it is also very common for acquirers to hire external parties to assist in the overall transaction. The NDA structure should be similar to them as it is to the parties involved. If the external party violates the NDA, the buyer will be held liable. You need to make sure that all parties involved understand the undertakings and the commitment in the agreed upon NDA.
Depending on what type of deal you have, NDAs usually vary from one deal to another. But even so, there are a few things that are constantly present that need to be negotiated properly to avoid unnecessary liability and litigation.
Mark has seen NDAs where it only restricts the buyer from disclosing any information gathered from the sellers. However, he firmly believes that NDAs should always go both ways.
"In an M&A deal, both parties take risks, so the risks should be shared mutually" - Mark Khavkin.
The buyer will disclose a lot of information regarding their plans on the seller's business, processes, and technology. The deeper you get into the process, the more information will be disclosed. The buyer also needs protection, just like the seller.
Duration is also very important to negotiate. Nobody should be assuming indefinite liability and indefinite operational obligation for any data that they have gathered.
In Mark's experience, the typical duration is three years, some extend to five years, depending on the rationale. But any longer than that would be unfair, and you need to avoid making such commitments.
It might sound unnecessary, but you have to define the scope of the confidential information clearly. Does it include the items that were verbally disclosed? Or ones in writing? Or is it just the documents that are explicitly marked confidential?
The entire purpose of the NDA is for confidentiality, so you need to negotiate and understand what constitutes confidential information.
It is also important to negotiate what you will do with the information/documents if the deal falls apart. Do you have to destroy it? Do you have to return it? Do you have to keep it for some time? These should all be clearly laid out in the final NDA.
This particular clause is very common in all NDAs. It encompasses everything that you, as the buyer, cannot do with the people you encounter in the seller's company.
You need to negotiate what happens when the people not included in the NDA, from the buyer's organization, recruit the seller's employees in good faith. Is that a violation of the non-solicit? It should also be bilateral to avoid the seller from recruiting the acquirer's employees.
According to Mark, this is the most challenging part of NDA negotiations and usually the last item to be resolved. If the seller is being unreasonable, this could instantly break a deal. The residual memory clause includes the retained knowledge and information that a person can no longer forget or unlearn during diligence.
When negotiating this, the best-case scenario would be to allow residual memory but only if you do not deliberately attempt to memorize; no notes, documentation, reports, or pictures. Any more than that would be unfair, as it is part of the diligence to learn their proprietary process and understand their value.
There are many things that you need to consider and negotiate in an NDA. This is a serious commitment that could amount to unlimited liability if breached. It is important that everyone on your team fully understands everything written and agreed upon in the NDA before you sign and move forward.