So you have a great idea or a product and want to share confidential information with your prospective business partner.  You should consider what information you will be sharing and make sure you are protected with a well-crafted non-disclosure agreement (also referred to as an NDA, or confidentiality agreement).  Find out more about how we can help you here.

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This is intended to help outline the general process of buying a small business in New York, explaining the legal aspects of how a corporate attorney can assist in a business purchase transaction (it is not intended to be construed as legal advice for your particular situation).

Your business acquisition attorney is not only your legal expert, but also will facilitate the business purchase process.  Your business lawyer will coordinate the processes, interface with all the players, and move the business transaction along, culminating in a successful closing.  As your legal expert, your business lawyer will conduct the legal due diligence, negotiate, draft and review the necessary legal documents, and should be intimately familiar with the legal intricacies aspects of your business purchase — keeping abreast of the facts and circumstances of the deal and advise you on any resulting legal consequences, and preparing the strategies to avoid legal problems.

1.  Of course, the first step in buying a business is to find a business to buy.

You can find businesses to buy in the classified section of most metropolitan newspapers, on those newspapers’ websites, in the Wall Street Journal, through your own networking efforts – whether in person or on the internet (like LinkedIn or Facebook), or through business brokers.  Corporate lawyers generally do not sell businesses unless they act as a broker or finder or happen to know a client or acquaintance who wants to sell a business.  There are tons of businesses for sale — the question is whether acquiring the business makes economic sense (and is the right business for you).

After you have identified the possible acquisition target, you (with the assistance of your corporate attorney) need to conduct due diligence on the business (investigate the business, its contracts, customers, financial reports, among other things) and determine what the business is worth and the terms of the purchase.  These steps are not mutually exclusive, they are interdependent and occur simultaneously — as you find out facts about the business, these may reflect on the business terms of the deal.

2.  The “Term Sheet” — Negotiating the Business Terms of the Purchase

While you are conducting due diligence on the business you intend to buy, you should begin negotiating the terms and conditions of the purchase of the business. This high level “term sheet” outline, would sufficiently detail (without necessarily including all the legalese), some of the following items, among others:

The parties to the business transaction;

Is the transaction to be structured as a stock purchase (buying all of the assets and liabilities of the business) or only purchasing certain assets of the small business (real estate, accounts, intellectual property, among other assets);

The purchase price and what assets or stock is being purchased;

The timing of the payment of the purchase price (lump sum or in installments);

If payment is installments, the amount of the down payment and the interest rate, and the collateral securing the note (also consider conditions to repayment (e.g., only from profits);

Binding and non-binding terms; and

Confidentiality obligations.

The “term sheet” (also known as a “LOI,” “letter of intent,” “MOU,” or a “memorandum of understanding”), which could be as short as a page or two, should expressly state that certain obligations are non-binding on the parties.  You may want to state that either party could walk away from the deal if they change their mind (maybe after a no-shop period), but you might want to make certain terms binding like reimbursement and confidentiality obligations.  As that the stock purchase agreement or asset purchase agreement will be drafted from the term sheet, you need to be as specific as possible with respect to contingencies to closing, offsets to the purchase price and other obligations (it will be hard to convince the seller to agree to terms in the resulting agreement differing from the deal points already agreed upon in a term sheet).

You should consult a business attorney at some point during the drafting of the term sheet (even if the first draft of the term sheet is prepared by the business person, you should have your business attorney review and/or negotiate it before it is signed).  Please see my post “Negotiating the Terms of the Deal — Buying or Selling a Small Business In New York” for a more detailed discussion about putting together a term sheet.

3.  Conducting Due Diligence

Due diligence is the process of thoroughly investigating the business being acquired.  The outcome of your business due diligence may very well impact the price you are paying and other terms and conditions of the term sheet.  You will want to have your financial advisor review prior years’ tax returns and financial reports.  You should have your business lawyer review all major contracts (including leases) to see if there are any “atomic bombs” that may be triggered by the sale of the business or that have any surprise obligations or rights (balloon payments, rights of first refusals, right to terminate, rights of consent, etc.).  If the business owns or leases real estate you want to review all documentation, leases, surveys, and environmental reports (or order one if there is a possibility that the business in question (or its predecessors) might have contaminated the land.  Read “How to Conduct Due Diligence for a Merger or Purchase of a Business“, for more details and a checklist of some due diligence items that should be reviewed by you and your corporate attorney.

4.  Preparing the Proper Documentation for the Business Purchase

There are many documents needed when transferring a business: the stock purchase agreement or asset purchase agreement, assignment and assumption agreements, deeds, consents, tax filings, among others.  You should consult a New York business attorney to negotiate, draft and/or review these instrumental agreements and documents which are necessary to transfer the business.

The most important document in a business sale is the “purchase agreement” (also known as the “sales agreement” or “acquisition agreement”) — and will be in the form of a stock purchase or asset purchase.  To protect yourself as the buyer, your attorney should prepare the first draft of this document. Otherwise, if the seller’s attorney prepares the sales agreement it can be one-sided, or worse yet, if the attorney is not too experienced, it might not cover the terms and conditions to the business sale that properly encompasses the complexity of the business or transaction.

Once the purchase agreement has been finalized, your business attorney can prepare the “closing checklist” of all of the consents, documents, filings, and agreements that need to be prepared and executed, and a list of all contingencies that need to occur on or before the “closing.”

5.  The Closing of the Business Purchase

Generally, the closing consummates the transaction (unless of course, there are post closing obligations to occur).  At the closing the parties and their corporate attorneys get together to exchange money and property, sign documents, and handle the remaining paperwork.

If you are considering a buying a small business in New York, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer.  There may be important tax and other legal consequences to consider before making the decision.

A Non-Disclosure Agreement (also known as an NDA or confidentiality agreement) is meant to protect a business from its employees misusing valuable proprietary information.  Often it is a good idea to have a confidentiality agreement in place with each of your employees (regardless of position).  For instance, your receptionist and salesperson might have access to your customer lists, which your company would deem confidential.

You should not use a “form” NDA that you download from the internet or obtained from another business.  Your NDA should be customized for the facts and opportunity at hand and more importantly, for your particular business.  It is important to keep in mind that your company’s confidentiality which is designed for the purpose of a “business-to-business” transaction (where both corporate parties disclose confidential information to each other) won’t suffice for the employer-employee relationship.  You should consult a New York Business Lawyer (or corporate attorney) to prepare your company’s employee confidentiality agreement.

Your employee non-disclosure agreement should be specific as to what is considered “confidential information” and also include things that the employee ought to reasonably know is confidential.  You should also include company trade secrets (see “When Do You Need a Nondisclosure Agreement (NDA)?” for more discussion about Trade Secrets).

Your corporate attorney should set forth for what purposes the employee can use the confidential information and how he or she can use the confidential information (may not be removed from the offices, no reverse engineering, no copying, etc.).  Of course, you need to have provisions specifying what the employee must do with the confidential information when his or her employment ends.

Your company lawyer needs to add “teeth” to the NDA stating that employee indemnifies the company for any breach and that the company may resort to any remedy at law or in equity to enforce its rights in the proprietary information (this means the employee could be sued for monetary damages as well as enjoined from using the information).

Of course, depending on what your business does, an employee confidentiality agreement may be part of a more encompassing agreement that includes provisions limiting the competitive activities of an employee when he or she leaves your company (sometimes referred to as a “non-compete agreement” or “forfeiture for competition agreement”) and requiring the employee to disclose prior inventions (and promise to either not include the prior invention in what they create for your company and/or grant your company a royalty free license to otherwise use the prior inventions).

Lastly, like protecting trade secrets, it is not enough to merely have non-disclosure agreements (confidentiality agreements) in place — your company needs to implement policies and procedures to maintain the secrecy of your company’s confidential information.

I recommend that you consult with a New York Business Lawyer to prepare your company’s employee confidentiality agreement, “non-compete agreement” or “forfeiture for competition agreement” to help ensure the best ways to protect your company’s confidential information and competitive edge.

There are plenty of reasons to have an NDA.  I will limit this post to discussion of using an NDA between technology businesses in an arms-length transaction. More often than not, for whatever reason, whenever there is a technology related transaction at hand, the parties want to sign nondisclosure agreements right away.   On one hand, it is very advantageous to make sure your confidential information and trade secrets are secure.  On the other hand, I don’t advise exchanging confidential information with strangers right away.  Regardless of whether there is a signed NDA in place, it is best to keep your secrets to yourself until your interest in the opportunity at hand is piqued to the point where you believe the potential relationship might get serious.

Up until that point, a technology company can demonstrate its capabilities without necessarily disclosing the “secret sauce” of “how” it does it (note, if the capabilities are is as much a secret as “how” it does it, then this may not apply).

You should not sign a “form” NDA. Each NDA should be customized for the facts and opportunity at hand. You should call us (or another New York Business Lawyer or corporate attorney), highly experienced in business and technology matters to review, negotiate and revise any form NDA presented to you to sign.

A Nondisclosure Agreement is more than a commitment to keep your confidential information secret — you also don’t want the other party to use your confidential information for their own benefit.  You want to protect your ideas with the NDA.  As the old saying goes (absent a promise to keep a secret), “ideas are as free as the wind.”  Copyrights can protect your “expressions” of an idea (like music, a novel, software code, or a photograph or painting, among other things); and a patent can protect your idea that is used to create a nonobvious and useful invention.  But an idea is free to copy – so you need to protect them as a secret.  This means that other party should never be able to use your idea freely; a well drafted NDA should limit the purposes for which the confidential information may be used.

Trade Secrets.  A trade secret is an idea that derives independent economic value from not being generally known to the public or readily ascertainable by proper means by third parties who could obtain economic value from its disclosure.   You can’t just say that some information about your business is a trade secret.  You have to take efforts to keep it secret (like keeping the formula to Coke in a safe and have employees sign NDA’s).   You should also take care in the NDA to distinguish the treatment of confidential information and trade secrets.  This is important because most NDAs have an expiration date after which a party is free to reveal the confidential information (e.g., either an express term or a certain period of time following the date of disclosure).  You never want an expiration date with respect to the obligation of keeping a trade secret confidential.  You also never want to have too long of a term to keep regular confidential information secret (especially in the world of technology where the information could be obsolete in a couple of years).

Having said this, if you’re revealing a trade secret, which you should do in the rarest of occasions, the obligation to maintain the secret should be an absolute must, and in all events, last forever.  This is because once an obligation to maintain the information confidential is gone, then it no longer can be deemed a trade secret (the toothpaste is out of the tube and cannot be put back).  Courts will not protect your right in that trade secret after you’ve consented to it being publicly revealed.

**This post is for informational purposes only, For legal advice contact a business lawyer**