We often start our business meetings with the proverbial “do we have an NDA in place” but when it comes to having discussions surrounding potential business combinations it goes beyond sharing trade secrets. Listen as we dive into the importance of NDAs when entering into an M&A process.
Read our blog post on the importance of M&A Focused NDAs here.
The need for NDA’s are critical and the ways they are beneficial / required are endless. When working with your advisor or managing a deal on your own be sure to protect your confidential information BEFORE engaging in any discussions.
For more information on preparing for a transaction check out our available resources at revenuerocket.com
Mike Harvath 00:02
Hello, and welcome to this week's Shoot the Moon podcast broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. I'd like to welcome my partners, Matt Lockhart and Ryan Barnett, to today's podcast, an interesting topic for you. We're gonna talk about non disclosure agreements (NDAs). So over to our host and moderator Ryan, to run the show. Over to you, Ryan.
Ryan Barnett 00:31
Hey, great. Hey, Mike. Hi, Matt. Thanks for joining us here today. When we talk about topics for the week, we look at things that are hot on our radar, and one of them is a bit of an Intricity. But it's important in a transaction, is a nondisclosure agreement. So in talking through what NDA's mean to people and companies and and why they're important, I want to start this out by stating a we're not lawyers, we're not legal counsel. But we end up dealing with NDAs on nearly every company that we talk to that goes to substantial talk. So Mike, just start out with a very softball question, you know, what is an NDA?
Mike Harvath 01:13
Thanks, Ryan. Yeah, and the NDA is essentially a nondisclosure agreement between parties are looking to have a substantive conversation about a potential business transaction. And in our world, it's mostly has to do with mergers and acquisitions. But certainly NDAs can be used for a variety of different types of conversations that are sensitive. And, you know, the concept is that something that someone might learn pursuant, or as part of that conversation, shouldn't be used in a competitive scenario, by the other party or be disclosed in the wild, if you will, or disclose to the public, the nature of those conversations, the items that are disclosed, you know, maybe things like customer lists that were disclosed, or employees or financials should remain confidential.
Ryan Barnett 02:12
Okay, so essentially, the basic if there's protected type information, this gives the writer ability for two companies to discuss that information and keep it private. So kind of the general sense about what would you say in NDAs?
Mike Harvath 02:27
Yep, that's the general gist. That's what I call the overarching intent. Oftentimes that morphs and other things which we'll explore this call, that is the overall intent, and that's why they were even, you know, conceived and one of the practice,
Ryan Barnett 02:44
okay, okay, great. And Matt, just one of the general question is, if we're thinking about M&A fraud, what why is it important for for these M&A for these NDAs to be in place? Is there? What are sellers looking for? What a buyer is looking for and why they insist on having an NDA to in the first place?
Matt Lockhart 03:06
Well, sure, Ryan, I mean, you know, obviously, there's a there's, there's a whole bunch of proprietary information that is being shared between parties, right, including financial information, could be some trade secrets could be the special sauce that a firm has, and, and, you know, critical for for that non publicly disclosable information to be kept confidential. But even before that is, you know, is that, you know, when you're thinking either as a buyer or a seller about entering into the process of merger and acquisition, well, that's, you know, that's important information. That's competitive information. That is important. That is not disclosed until the appropriate time. Yeah, think about it. If you're in the, in the shoes of a seller, and, you know, a firm is considering selling the business. Well, you know, important that customers don't know, until the appropriate time important that employees don't know, until the appropriate time. And so, you know, it's just it's, it's providing comfort to the parties that their secrets as well as their intentions and, and strategy are disclosed to the public.
Ryan Barnett 04:38
Okay, makes a ton of sense. Thanks. Thanks, man. And this, I think, Mike, you might be best to answer this is. Can you tell us a little bit about the types of NDAs and then I'm thinking here is as an advisor, we may sign a little an NDA different than I guess I'm curious on what's what's a mutual NDA. Where's the third party need to be you're involved in an NDA, kind of who signs an NDA? Is it the customers that the advisor or is it someone else? And and who does the NDA cover? Does it for example, does a NDA cover? If you sign it with a company? Does it cover advisors in touch with it?
Mike Harvath 05:17
Yeah, for sure. So most of the time, a mutual NDA is one that signed by two parties are typically in our world, or they're the parties that are pursuant to a conversation about a potential M&A transaction. And there's language in the NDA that covers their advisors, when they say, their advisors, their respective advisors could be, you know, folks, like us, as an M&A advisor, could be a banker, or a lawyer or someone who's advising them around the nuance of the transaction. And I would say, most NDAs are structured that way. Now, we approach it a little differently and hold ourselves to a little higher standard in that many of the NDAs that we sign most probably, we are also a party to that non disclosure. And there's specific reasons for that, legal reasons for that, in that it holds us as an intermediary and advisor to a much higher standard of disclosure, than it does if we're simply referenced as an advisor in the NDA. And, you know, there's, of course, opinions, pro and con on this approach. But it's typically how we've done it. Just ourselves, we know that there's differing opinions as well, based on advisors and their own positioning. And, you know, and what sort of legal restrictions are held to but we've always wanted to, you know, as revenue racket communicate to the market that we're held to as highest standard of disclosure, as the parties that are in the agreement, they're discussing an M&A combination, and that we will not disclose to anyone. Outside of that conversation, anything we learn about someone's interests, motivations, desires, financials, or otherwise. So that there's more comfort, particularly based on a seller getting into the wild or getting into the market, or disclosing that they might be in the market. So hopefully, that adds some clarity, Ryan to the different kinds of, you know, who what parties are covered, how they're covered. And, you know, how people may be mentioned or not mentioned in an NDA.
Ryan Barnett 07:55
Absolutely. And it's just it's so core to what we do, we almost forget the importance of it some days. And also, it's, it's something that I think, has a fair amount of flexibility. And in what's done, I think, if we look at what a core of an NDA does is, it helps us protect the information that we want to protect, as a seller or buyer in this process. I believe that even with an NDA in place, you still want to keep information private until the appropriate time. And so some very specific examples on that are customer lists customer names, it's, you don't need to disclose to a potential competitor, buyer who your potential customers are until there's due diligence, we can talk around them to talk about them. But listing the customers themselves is something that with or without an NDA, each of you should probably keep away from the same goes with employee name. So we typically will say hey, anything before in a letter of intent, and substantial due diligence, that you should cover your employees and your customers with or without an NDA. Which brings me to something we've seen lately that's been up in relative interest, which is we've had a few companies that have essentially bypassed and skipped the NDA process completely, pursuant to an introduction meeting between two firms, essentially, just to say, Hello. Love to hear Matt, maybe your thought your thoughts on that and if that's something that companies should consider or steer away from?
Matt Lockhart 09:44
Well, you know, I think it's, it's okay. You know, it's always good to meet people. You know, and there's an opportunity to sort of build some build some trust and build some relation. And, you know, Mike use the term comfort, right, in terms of being comfortable with sharing information. And Ryan, your point is spot on. Just because there's an NDA in place, that doesn't mean that you should be completely open kimono, you know, timing these things. And, you know, that's our role to guide customers accordingly. But if a firm and is like, well, let's, you know, let's just meet people, well, that's, that's what you'll get you, you'll get meeting people, you, you know, there can be discussions about the publicly available information, you know, website, you know, and, and all the, you know, the things that you would learn publicly, but clearly, to get into what is the core, the nuts and bolts of the intentions of both firms, then it just makes sense, it just makes sense to get an NDA in place so that people are comfortable, right? I mean, in, in my past days is, in working with customers, you know, we would say, Look, you know, we're more than happy to have an NDA in place, just so you feel comfortable. Right. Now. The reality is, especially for us as advisors is, is that it's really critical that we're building trust, right, and building a super high degree of trust. So, you know, we're not going to disclose the wrong information, or disclose information, the right information at the right at the wrong time, regardless of whether or not there's an NDA in place, because, you know, there's nothing more important as an advisor than then having the trust of our clients, as well as the trust of our, of our prospects. I mean, our name if our name is muddied, well, then, you know, we're no good. Right. And so, yes, it's okay to to, to have an initial discussion without an NDA. But we need to be super clear to progress an opportunity and NDA is critical.
Ryan Barnett 12:21
Yeah, I think it's really well said that and turned on topic a little bit. Mike, what do you think when targets especially perhaps target lawyers start marking up an NDA? Is that an indication of of anything else in the deal flow?
Mike Harvath 12:41
Well, it's a great question, Ryan, I think, you know, we've gotten into a spot in some cases where people overthink the nondisclosure. And they want to negotiate and pick terms that frankly, just don't matter. Things like non solicitation, lockout, timing, is a good one of those, whether it's a year or two years or 20 years, you know, getting so wrapped around the axle on the timing for which someone could solicit employees is sometimes, you know, a situation that can put getting an NDA in place at all at risk. And we think some of these points, we sort of see some of these points over and over about no solicitation disclosure, timing, time, Windows and lockout windows, oftentimes, particularly alleles involved on either side, become a real crazy sort of exercise where you might have four or five, six turns on an NDA, it does send a message to a seller, or the other party that you're difficult to deal with if you're driving those changes. And I've seen more situations lately, where people just will refuse to change the NDA or refuse to go more than one round of changes on the NDA. And take away from that the perception that the other party is too difficult to deal with. If they're too difficult to deal with in an NDA negotiation, they will be far too difficult to deal with in a transaction or M&A negotiation. And they're going to cut their losses and not talk to that person. So I think you have to be somewhat careful with the amount of changes and requests that you may want in an NDA to try to perfect it. Right. It's likely not going to be perfect. And you always control the information that you disclose when you disclose it. And frankly, how fortified the NDA is, at any particular stage in the process. So we mentioned earlier that, you know, some firms are going the route of no NDA for an initial meeting. Or maybe the language isn't perfect, but they sign it anyway and have an initial meeting or early meetings. And then they come back around if those conversations get more serious, and they need to begin disclosing more information, and sort of rewrite the NDA, so it's more appropriate. And certainly at that point, you have more trust, that you've established more of a relationship with the other party. And you're in a position to, you know, frankly, get more restrictions into the NDA. But to try to bake all that in before you know each other is probably a big mistake, in my opinion. And we've seen many situations where, you know, if the other party wants to turn on that NDA negotiation into a big science project, you know, the folks that are in the middle of that will just throw their hands up and say, We're not going to talk to them, because it's too hard to get the NDA negotiated.
Ryan Barnett 16:15
Yeah, it's very interesting. The, one of the situations, things that we have seen is that people trying to use NDAs, in initial conversations, to prohibit a competitor from doing business. And that's an interesting one, we're dealing with one right now in which a target won't sign an NDA, because they're worried that they're precluding themselves from doing business in which a company may be in that same market. Matt or Mike, feel free to jump in on this one. But it is NDAs are don't seem like a great tool to stop business. And they're not really written to do so. And I'm curious, is there any advice that you could give to people? When, for example, this is the exact one we heard, I hear I don't want to sign this NDA because I feel I'm not going to be able to do business in this territory, if I do. So. I mean, how valid is that concern?
Matt Lockhart 17:17
Not! Oh, it's just, you know, let's I think it's important, right? I mean, so in, in in any, you know, m&a transaction, right. What are the key legal documents? Right, you know, there's an NDA, that's the easiest, right? There's a letter of intent. You know, there's a definitive agreement, there's employment contracts. And each of these, you know, pieces have specific reasons. But the reason, right, but going back to just the core principle of an NDA is just the sharing of information. It is not intended to change or restrict ongoing business practices, right, to limit the know, how you would conduct business. Other than specific if there's a specific trade secret or patent secret or something along those lines, that it's just protected. So, you know, people people do, oftentimes they overthink it, you know, like, like Mike said, and and those would be scenarios of overthinking and, you know, important to, you know, when you're entering into a discussion, to be eyes wide open, that you're entering into a discussion, right. And it's, it's just that you are, you're you're starting the path of building a relationship and building trust. And if you're so weary, weary, I should say about that, then, you know, maybe it's not the right time to start a discussion.
Ryan Barnett 19:02
Yeah, exactly. And the last topic here in not to get too in the woods, but what's the importance of data sharing tools in this process? So, for example, data rooms that are out there, and where how should data and what level should be shared and particular services? Why is the data room important once an NDA is in place?
Mike Harvath 19:28
Well, I'm happy to jump in on this one, a data room is critical. For a lot of reasons. First of all, if there is a violation of a nondisclosure agreement, the party that's been harmed has to show very definitively what information was disclosed and by whom and that it actually harmed the business. And that cannot be done very effectively, if you're just emailing documents around willy nilly, right, so the the reason that data rooms are typically used is one, certainly there's just one version of the truth. So makes it easy for everyone to look kind of at the one version, you don't have what I call version itis where there's 15 versions floating around, and no one has any clue as to whether or not they're in the current version or not. Because there's just one version of truth. But much more importantly, there's lots of data as to who's looked at the data, when they looked at it, when they downloaded it, when they checked it out when they checked it in. So that in the wildly unlikely event, and I'll just add that we haven't seen any situations where people have used data inappropriately or, quote, unquote, blatantly violated an NDA, at least in our our history over the last 20 plus years. But but in the event that that should occur, you know, the harm party has to show that, you know, there was a disclosure by someone or likely that it was disclosed by someone, certainly after that data, let's say if it was downloaded, you can't control what happens with the data if someone downloads it or takes it and you know, as a bad actor, right, that's pretty tough. But at least you can know where that data who the data was disclosed to, so you can narrow down any investigation to who would have had access to the data. And ultimately, you know, be able to protect yourself pursuant to the terms of the NDA. So, you know, I guess to summarize it, it's one that provides sort of one version of the data, but also, more importantly, to know who's looked at the data, and to protect yourself pursuant to your non disclosure.
Ryan Barnett 22:07
Yeah, absolutely. Matt, Mike, I think we've covered NDAs about to death. I just to wrap it up there the the critical to share information of trust. When we look through this, it's something that becomes everyone has their own version. And one of the things that I've even seen is companies signing two versions of NDA is one for each company, to help smooth out the process. I think just as Kratos fills that document is the understanding that all parties have that they're sharing critical information. And it's a step towards moving toward towards a business relationship. So for example, we kick off an introduction call, but we know that everyone's under a call pursuant to a potential transaction. So what's on the call, keep on the call, but please feel free to share information. It's going to make all parties aligned. So critical, it helps us protect each other. But it's you still have to use that common business sense to keep the most confidential information, your secret sauce, your customers, your employees, to yourself until it's the appropriate time to dispose. With that, Matt, Mike, thank you for this cover. Cover that and Mike, I'll turn it over you to wrap it up.
Mike Harvath 23:24
Thanks, Ryan. We look forward to having you join us next week. Thanks again and take care!