Non-disclosure agreement (NDA)

A non-disclosure agreement (NDA) is a contract in which a potential buyer promises to keep information about a business confidential and to use it only to assess the purchase. Sellers and brokers usually ask for one before revealing the business's name, detailed financials or an information memorandum. In the UK it is often called a confidentiality agreement.

A fictional buyer is interested in a listing for "an established commercial cleaning company in the north of England". The broker sends an NDA, which says the buyer must:

• keep everything confidential for three years
• not contact the company's staff, customers or suppliers directly
• not hire any of its employees for two years if the deal does not go ahead
• return or destroy all documents on request

Only after signing does the buyer learn the business is Aireview Facilities Ltd, a fictional company, and receive two years of accounts.

Signing an NDA is a normal step and usually low risk, but read it. Clauses that stop you hiring staff, approaching customers or competing can matter if you already own a similar business or plan to buy one. Strategic acquirers and private equity firms with existing portfolio companies should check that wording carefully.

Keep a record of what you signed and when. It also pays to screen a listing before you sign anything. A Loupe dossier works from the listing and public records, so it can raise questions about the business before you sign an NDA or pay an adviser.