Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The NDA Non-Circumvent Trap in M&A Deal Sourcing
Transcript
- Lucas: You sign an NDA before seeing a deal teaser — standard practice. But buried in that confidentiality agreement is a clause that can cost you the entire acquisition. Luna: The non-circumvent clause. I've seen seasoned operators gloss right over it. Lucas: Exactly. And it's one of those provisions that looks harmless on first read. It says something like, 'the recipient shall not circumvent or bypass the seller or its representatives to negotiate directly with the target company.' Sounds reasonable, right? Seller wants to control the process. Luna: But the trap is when you already have a relationship with the target. Maybe you've known the CEO for years. Lucas: That's exactly where it bites you. Let me give you a concrete case. 2023, a mid-market private equity firm was looking at a specialty manufacturer doing about $30 million in revenue. The seller's banker sends the teaser, the PE firm signs the NDA. The non-circumvent clause had what's called a 'prior contact' exclusion — meaning if the buyer had already been in touch with the target company before signing the NDA, they could proceed. But the definition of 'prior contact' was incredibly narrow: it only counted written communication initiated by the buyer. Luna: So what happened? The PE firm's managing director had had coffee with the target's CEO at an industry conference six months earlier. But it was verbal, no email trail. Lucas: Right. When the PE firm tried to claim the exclusion, the seller's banker said no. The coffee didn't count because it wasn't written. The PE firm had two choices: stop talking to the target entirely, or try to negotiate a waiver from the seller — which would signal how badly they wanted the deal. They chose to push back, and the seller walked away. The target was eventually acquired by a different buyer for $45 million. Luna: And the first PE firm got nothing. No deal, no fee, no return for their LPs. All because of a ten-minute chat. Lucas: The non-circumvent clause is basically the seller's way of keeping you from cutting them out of the deal. If you go around the intermediary — whether it's a banker, a broker, or the seller directly — you're essentially stealing their commission or their negotiating leverage. But the clause is often written broadly enough to cover casual conversations you had before you even knew the company was for sale. Luna: So as a buyer, what do you do? You can't un-ring the bell. Lucas: You negotiate the NDA before you sign it. I know that sounds obvious, but in practice, especially in auction processes, the seller's banker will say, 'this is our standard form, take it or leave it.' But there's room to move. The key provision to ask for is a broader 'prior contact' definition — one that includes oral communications and meetings, not just written ones. And you want it to be self-executing: you certify that you have had prior contact, and that certification is enough. The seller can challenge it later, but at least you're not blocked from day one. Luna: Another angle: the sunset clause. Some buyers negotiate a time limit on the non-circumvent restriction. Lucas: Yes, that's powerful. You can say, 'the non-circumvent provision expires 90 days after the NDA is signed, or after the seller terminates the process.' That way, if the deal doesn't happen — say the seller decides not to sell — you're free to reach out to the target company in six months on your own. Without that sunset, you could be locked out forever. I've seen non-circumvent clauses that have no expiration tied to the NDA's termination. The NDA ends, but the non-circumvent survives indefinitely. Luna: Which is especially dangerous if you're a strategic buyer. You might not be interested today, but two years from now, that target could be a perfect fit. Lucas: Exactly. And the seller's intermediary knows that. They want to protect their commission on any future deal. So they'll push back on a sunset. But if you're a credible buyer with a strong balance sheet, you have leverage. You can say, 'look, we're not going to sign an NDA that ties our hands indefinitely.' I've seen buyers simply refuse to sign and walk away from the process. And sometimes the seller blinks. Luna: The other side of the coin: sellers and intermediaries rely on these clauses. If you're selling your company, you want to prevent a buyer from poaching your management team or stealing your intellectual property. Lucas: Right, and the non-circumvent clause often goes hand-in-hand with a non-solicitation clause — you can't hire away key employees. But for the seller, the risk is that the clause is so restrictive that it scares off the best buyers. If a strategic acquirer who already knows your CEO has to jump through hoops to prove prior contact, they may just pass. So there's a balance. The best practice for sellers: define 'prior contact' broadly but require written notice within a certain window. Say, 'if you've had contact in the last 12 months, disclose it within five business days of signing the NDA.' That gives you clarity, and the buyer knows exactly where they stand. Luna: There's also the issue of affiliates. Some non-circumvent clauses are written so broadly that they cover your entire fund, your portfolio companies, even your co-investors. Lucas: That's a huge one. I saw a deal where a large pension fund was part of a co-investment vehicle. The NDA's non-circumvent clause covered 'all affiliates, including limited partners.' That meant the pension fund itself couldn't talk to the target company, even though it was just a passive investor. The pension fund had to sign a separate agreement just to do basic due diligence. It added weeks to the process. Luna: So the lesson for operators: read the NDA's non-circumvent clause as carefully as you read the price. It can kill a deal before it starts. Lucas: And if you're the one doing the buying, have a standard mark-up ready. I keep a version that defines prior contact as 'any substantive communication, oral or written, in the prior 18 months,' and includes a 120-day sunset after the process ends. I send it with the signed NDA and say, 'this is our standard form for all acquisitions.' Most intermediaries accept it. Luna: What about the seller who's not using an intermediary? Say a founder is selling directly. Lucas: Then the non-circumvent clause is actually protecting the seller. If a buyer signs an NDA and then tries to bypass the founder and talk to the management team or the board, the clause stops them. But the same pitfalls apply. If the buyer already knows the management team, they need a clear prior-contact definition. And the seller should be careful not to make the clause so narrow that it traps a legitimate buyer. I always advise sellers to include a 'no-fault' termination right: if the buyer can't proceed due to the non-circumvent clause within 30 days, either party can terminate the NDA without penalty. Luna: That's clean. It gives both sides an exit. Lucas: Yeah. And it shows good faith. Now, there's another version of this trap that's less common but brutal: the 'non-circumvent' in a letter of intent rather than an NDA. Some LOIs include a non-circumvent clause that survives even if the LOI expires. So if you spend six months in exclusive negotiations and the deal falls apart, you can't talk to the seller's customers or suppliers for another year. That's a poison pill. Luna: I've heard of buyers walking away from a deal just because of that clause. They'd rather lose the target than tie their hands on future business. Lucas: Right. And that's a real cost to the seller. The seller might have gotten a higher price from a buyer who is spooked by the restriction. So it's in the seller's interest to keep the non-circumvent scope reasonable. Just like everything in M&A, the details matter more than the headline number. Luna: Speaking of details, if this kind of practical walkthrough has helped you think about your own deal documents, we do this show ad-free and subscriber-free because of listener support. If today's episode was worth the price of a coffee to you, you can find that link at buy me a coffee dot com slash fexingo. It's a small way to keep these conversations going. Lucas: Yeah, we don't run ads, we don't have sponsors, we don't ask for much. But if the show has ever saved you from a bad clause or given you a better negotiating position, that link is there. Just buy me a coffee dot com slash fexingo. Luna: Okay, back to the non-circumvent trap. Another nuance: some clauses include a 'standstill' provision that prohibits the buyer from acquiring shares of the target without the seller's consent. Lucas: That's a different animal, but it's often bundled. The standstill prevents a hostile takeover, but it can also prevent a buyer from accumulating a toehold in the open market. For a public company target, that's standard. But for a private company, it's rare. Still, I've seen it in NDAs for private deals where the seller is worried about a creeping acquisition. The problem is, if the buyer is also a competitor, the standstill could prevent them from buying shares of a competitor they already own stock in. It gets messy. Luna: So the key takeaway: don't treat the NDA as a formality. It's a binding contract that shapes your deal rights. Lucas: Absolutely. And if you're a buyer, the non-circumvent clause is the first thing I look at after the confidentiality provisions. I want to know: can I still talk to the target if this deal falls through? Can my portfolio companies talk to them? How long am I locked out? The answers to those questions determine whether I even enter the process. Luna: And for sellers, the lesson is the opposite: make sure the clause is tight enough to protect your process, but not so tight that good buyers walk away. Lucas: Exactly. There's no one-size-fits-all. But the worst mistake is not reading it at all. I still see buyers sign NDAs without a second glance. They assume it's just about keeping secrets. But the non-circumvent clause is about keeping deals. Luna: And keeping options. So read it, negotiate it, and if you're not sure, ask a lawyer who does M&A — not your general corporate counsel. Lucas: Good advice. Next time, we'll look at another hidden trap: the 'most favored nation' clause in purchase agreements. That one can cost you millions if you're not careful.