By Corrie Thrasher, Founder of Thrasher Law
As a small business attorney, I often get asked to review nondisclosure agreements (NDAs) for clients who are selling their business. Sellers enter these agreements because they are about to share some of their most valuable information: customer relationships, financial data, pricing strategies, vendor agreements, and growth plans. But what happens if the transaction falls through?
Many business owners assume that an NDA prevents a prospective buyer from using any information received, at any point. Unfortunately, courts have repeatedly shown that an NDA is only as strong as its drafting. The best NDAs clearly define what information is protected, limit how it may be used, and create a paper trail that can prove misuse if a dispute arises.
Prohibit use, not just disclosure
Many NDAs focus on preventing “disclosure” of confidential information. That’s important, but the language is also important. A prospective buyer may never disclose your information, yet still use it to compete against you, solicit your customers, or improve their own business operations. For that reason, sellers should ensure their NDAs expressly state that confidential information may be used only for evaluating the proposed transaction and for no other purpose. Unauthorized use should be treated as a breach, even if the information is never publicly disclosed.
Be specific about what is confidential
An NDA should specifically identify the categories of information expected to be shared, such as customer lists and customer-specific data; financial statements; forecasts, margins, and projections; vendor information; and operational processes. In several recent cases, businesses struggled because they could not adequately explain what information was supposedly confidential or why it deserved protection, because they had not defined it upfront in their agreements concerning confidentiality.
Plan for a failed deal
An NDA should clearly address what happens to confidential information if negotiations end without a sale. It should require the prospective buyer to stop using the information immediately, return or destroy all confidential materials, including notes, copies, and extracts, and certify compliance upon request. These obligations reduce the risk that the seller’s information will remain in circulation after the deal falls apart.
To strengthen any later claim, the seller also should document what information it provided, when it was provided, and when it was due to be returned or destroyed. Clear obligations backed by good records help contain the seller’s risk and make the NDA easier to enforce if the buyer does not follow through.
Define the breach and preserve the remedy
An effective NDA should define both what constitutes a breach and what the seller can do about it. The agreement should identify unauthorized use, disclosure, copying, retention, or sharing of confidential information as violations. It also should preserve the seller’s right to seek an injunction and other equitable remedies because money damages may not be enough. For example, if a prospective buyer uses due-diligence materials to solicit the seller’s customers, the seller may need to stop that conduct immediately rather than wait years for a damages award. Clear breach terms paired with meaningful remedies make the NDA easier to enforce when prompt results matter.
Keep records that can prove misuse
Even the best NDA will not win a case by itself. Courts regularly look for evidence showing what information was shared, when it was shared, who received it, how it was accessed, and how it was allegedly used afterward.
Sellers should maintain data room logs, access reports, email records, and copies of materials provided during due diligence. If the buyer later competes for the same customers or launches a similar initiative, those records will become critical evidence.
Bottom line
When it comes to failed acquisitions, courts consistently focus on two questions: What exactly was protected, and can the seller prove it was used improperly? A well-drafted NDA, combined with thoughtful evidentiary documentation, puts business owners in the strongest position to answer both questions.
Legal Disclaimer: This article is for general informational purposes only and does not constitute legal advice. Readers should consult with a qualified attorney regarding their specific circumstances.
CORRIE THRASHER is the founder of Thrasher Law and provides ongoing legal counsel to business owners and executive teams who value consistent, senior-level judgment in business operations, growth, and complex transactions. Learn more at thrasherlegal.com.
