We know how confusing it is for business owners who are planning to sell a business for the first time, especially when it comes to understanding the various documents involved in the process. Having worked with thousands of businesses closely over the last few years, and with a number of successful deals to our credit, we are well-acquainted with the various deal documents. In this article, we will share with you the meaning and implications four key deal documents, and how you can use them.
- Non-Disclosure Agreement (NDA)
The NDA is a critical document, especially in the early stages of the deal. As a business owner, you will be sharing a lot of critical information about your business with prospective buyers who are genuine and show serious interest in your business. The misuse and mishandling of such information is a risk that worries most business sellers. The NDA is a means to safeguard the interest of the seller. While there are multiple versions of the NDA available, in general it states that:
- The buyer understands that any information shared with him is privileged information and has been shared only because he has shown genuine interest in buying the business
- The buyer cannot share any information about the business or about the seller with a third-party unless the seller has given explicit, prior consent for the same
- The buyer cannot use any know-hows, trade secrets or knowledge inputs gained from the information shared with him to further his own interests, or to benefit any other entity directly or indirectly
One of the key questions that sellers ask is, what if the buyer violates the NDA? While it is a legal document, and you can take legal action for violating it, seasoned buyers are usually well aware of the do’s and don’ts. If you are dealing with a first-time buyer, make sure you discuss the various provisions of the NDA with him.
- Term Sheet
The term sheet is not a legally enforceable document, but just a primer for the actual deal agreement. It formalizes the deal structure, terms and conditions, and valuation, and lays them out in a concise manner to act as a guiding document for the actual deal agreement.
Often, sellers are confused between a deal agreement and a term sheet. Remember, that a term sheet is not a guarantee for the deal to take place, as deals are known to break even after the term sheet has been signed. However, the deal agreement is enforceable and its violation has pre-defined implications on the party (buyer / seller) who breaches it.
- Memorandum of Understanding (MoU)
MoUs are signed at various stages of a deal, as and when situations arise that demand mutual agreement between the parties. For example, a buyer’s explicit intent to buy a business can be captured in a purchase intent MoU, pre-conditions related to payment to the seller can be captured in a separate MoU, and so on.
It is important to understand that while the MoU is a legally enforceable document, it is not the deal agreement and any conditions in the MoU cannot override the deal agreement. Also, the deal agreement remains valid even after the deal is closed, but the MoUs become invalid on closing the deal, or they become a part of the deal agreement itself.
- Deal Agreement
The deal agreement is a detailed document that captures the terms and conditions of the transaction, the payment terms, the rights and obligations of each party, representations and warranties, indemnity, dispute resolution mechanisms, post-sale involvement of the seller, implications of breach of the agreement by any party, and so on.
The deal agreement draws from the term sheet and MoUs signed, if any, but is much more detailed, elaborate and clear. It is usually drafted by expert legal advisors. Both the buyer and the seller receive a copy of the deal agreement each, duly stamped and signed by both the parties.
At IndiaBizForSale.com, we help thousands of sellers discover the right buyers and manage deals better through support such as deal document templates, business valuation services on request, dedicated deal associate for select deals, and so on. To know more about what we do and how we can help you, please write to us at [email protected].