Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How the Non-Disclosure Agreement Trap Silences M&A Sellers
Transcript
- Lucas: There is a document in M&A that almost every seller signs without a second thought. It's usually the very first piece of paper that crosses the table, and it can quietly lock a founder out of the entire deal process before they even know what hit them. Luna: You're talking about the non-disclosure agreement. The NDA. Lucas: Exactly. And I want to be really specific here because most founders treat the NDA as a procedural formality — like signing the credit card slip at a restaurant. But in the middle market, the buyer's NDA is often drafted to do a lot more than just protect trade secrets. Luna: What does it actually do beyond the obvious? Lucas: So let me give you a concrete case. First quarter of this year, I was talking to the founder of an industrial components manufacturer in Ohio — about eighty employees, family-owned, very profitable niche. He got a letter of interest from a strategic buyer, signed their NDA in order to receive the teaser, and within a week he realized he had no idea what his company was actually worth. He wanted to bring in a second bidder. Luna: And the NDA stopped him? Lucas: It didn't just stop him. It legally prevented him from even telling his own CFO that a deal was in play. The buyer's NDA defined 'confidential information' so broadly that any mention of the potential acquisition — even internally — was a breach. And the non-solicitation clause specifically prohibited him from contacting any investment banker or advisory firm that the buyer had previously worked with, which covered pretty much every credible middle-market M&A advisor in the Midwest. Luna: So the buyer essentially locked the seller into a one-bidder process from the very first signature. Lucas: That's exactly the trap. And here's the rub — the NDA had no expiration date. It didn't expire after the deal talks ended, it didn't expire if the buyer walked away. The founder in Ohio would have been bound by those restrictions forever, unless he negotiated an exit. He didn't. Luna: But he signed it anyway. How common is that? Lucas: Extremely common. Most sellers are so eager to get the process moving that they don't realize the NDA is actually the first leverage point of the negotiation. And once you sign it, you've already conceded terms that affect every subsequent step — your ability to shop the deal, your ability to hire advisors, your ability to even talk about the deal internally. Luna: What are the specific clauses that create this trap? Lucas: There are three that I want listeners to watch for. The first is the definition of confidential information. If it says 'all information disclosed by the buyer, whether oral or written, and the existence of discussions between the parties' — that 'existence of discussions' language is a red flag. It means you can't even tell your own management team that you're exploring a sale. Luna: Which is insane because you usually need your CFO's help to prepare financials. Lucas: Exactly right. The second clause is the non-solicitation of employees. This is the one that blocked our Ohio founder from hiring a banker. The buyer's NDA said the seller couldn't solicit or retain any person who was an employee of the buyer — but they also defined 'employee' to include independent contractors, which covered the investment bankers they had on retainer. It effectively blacklisted an entire tier of advisors. Luna: And the third clause? Lucas: Duration. A standard mutual NDA might last two to three years. But in a buy-side NDA, buyers often push for indefinite duration or a ten-year term. That means even if the deal falls apart, you're still bound. You can't go to another buyer and use any of the market intelligence you gained, you can't reference the valuation methodology they shared, you can't even tell your next suitor that you were in talks with their competitor. Luna: So the seller is effectively silenced forever. What should a founder ask for instead? Lucas: The first carve-out is an explicit exception for seeking competing bids. You want language that says 'the seller may disclose confidential information to potential acquirers and their advisors in connection with a sale of the company.' That should be in there from the start. Second, limit the non-solicitation to direct employees of the buyer, not independent contractors or affiliates — that keeps your advisor pool open. Luna: What about the duration? Lucas: Push for a twelve-month sunset. If the deal hasn't closed within a year, the NDA expires. And if the buyer pushes back, you can offer a compromise: the NDA survives for two years, but the non-solicitation clause expires after six months. That gives you room to bring in a banker if the process stalls. Luna: Is there any scenario where a seller should just walk away rather than sign a bad NDA? Lucas: Absolutely. If the buyer refuses to include a carve-out for seeking other bids, that's a major red flag. It tells you they want a controlled, exclusive process from the start. Walk away. There are plenty of buyers who will sign a reasonable NDA. The ones who insist on a one-sided lockup are signaling how they'll behave in every other part of the deal. Luna: That makes sense. But what about the seller who is already in a binding NDA — can they get out of it? Lucas: It's difficult, but not impossible. If the NDA is truly indefinite and overly broad, a court might find it unconscionable. But you don't want to litigate. The better path is to go back to the buyer and say, 'We need to amend the NDA to allow us to engage advisors and consider other offers.' If they refuse, you have your answer about their good faith. Luna: I want to zoom out for a second. The NDA trap is really about information asymmetry, isn't it? Lucas: Completely. The buyer has done dozens of deals. They know exactly which clauses create leverage. The typical founder has sold zero companies. They don't know that the NDA is a negotiation — they think it's a formality. And that knowledge gap is exactly what the buyer exploits. Luna: So the real lesson is: treat the NDA as a substantive document, not a procedural one. Lucas: Yes. And if today's episode helps even a few founders read their NDA more carefully before signing, then it was worth doing. You know, moments like this are exactly the reason we keep this show ad-free — because these are real, practical insights that can save someone a lot of money and pain. Luna: That's a good point. If you found this useful, the way these conversations stay free is listener support. Lucas: Yeah, it's simple. Buy me a coffee dot com slash fexingo. That's all lowercase. No pressure, just if it moved the needle for you. Luna: Alright, back to the NDA. So we've covered what to ask for. But what about the timing of the NDA — when should a seller push back? Lucas: The best time is before you sign anything. Once it's signed, you've lost leverage. But if you're already in one, the second-best time is before you share any proprietary information. If the buyer sends you an NDA and you haven't exchanged any data yet, you can still negotiate. The moment you send financials, the clock starts ticking and you have less room. Luna: So the rule is: negotiate the NDA before you open the data room. Lucas: Exactly. And bring your own draft if you can. A seller-side NDA is almost always more balanced. It starts with the presumption that you can talk to other bidders, that the confidentiality lasts a reasonable period, that you can involve your advisors. If the buyer insists on using their form, you at least know what you're up against. Luna: Have you seen any buyers actually walk away when a seller pushed for reasonable changes? Lucas: Rarely. If they walk away over a twelve-month sunset clause or a carve-out for seeking other bids, they weren't serious buyers. They were fishing for information. And you're better off without them. Luna: What about the interaction between the NDA and the letter of intent? Do the NDA restrictions carry over into the LOI? Lucas: Often, yes. The LOI will reference the NDA and incorporate its terms. So if the NDA has a non-solicitation clause that says you can't talk to other buyers, the LOI can reinforce that. That's why you want to clean up the NDA before you ever sign the LOI. Otherwise you're layering restrictions on top of each other. Luna: So the NDA actually sets the tone for the entire deal. Lucas: It does. And I think that's the takeaway I want listeners to walk away with. The NDA is not just a piece of paper. It's the first test of the buyer's character. If they're reasonable on the NDA, they'll probably be reasonable on price and terms. If they use the NDA to box you in, expect a fight on every single issue. Luna: That's a good framework. So next time you get an NDA, read it like it's the first chapter of the deal — because it is. Lucas: Exactly. And if you're not sure what to look for, go back and listen to this episode. Better yet, hire a lawyer who does middle-market M&A. A few thousand dollars on legal review upfront can save you millions on the back end.