Signing an NDA Before Seeing a Manitoba Business's Financials

Before a seller will show you revenue, customer lists or tax records, they will often ask you to sign a non-disclosure agreement. It is a common first step, and it can feel like you are being asked to agree to something before you know anything about the business.

This article explains in plain terms what an NDA generally restricts, which terms to look at closely, and what risks to weigh. It also covers what you will probably want to check once you have access, so you can make sure the NDA does not get in the way.

This article covers the law of Manitoba.

What an NDA generally does

An NDA is a contract. In it, you promise to keep the seller's confidential information private and to use it only to decide whether to buy the business. The seller is trying to protect things such as financial results, pricing, supplier terms and customer details from being shared or used against them if the deal does not go ahead.

Signing an NDA is normally separate from agreeing to buy. It does not usually oblige you to make an offer or complete a purchase. Whether a particular document says that clearly depends on its wording, so read it for any language that goes further than confidentiality.

Terms to watch before you sign

• Definition of confidential information: is it narrow and specific, or does it cover everything the seller says or that you could find out on your own?
• Permitted use: does it allow you to use the information to evaluate the purchase, and nothing else?
• Who you can share with: does it allow your lawyer, accountant, lender and any co-investor to see the information?
• Length: how long do the confidentiality duties last, and do they end for information that becomes public?
• Return or destruction: what must you do with documents and notes if you walk away?
• Extra promises: look for clauses that stop you from hiring the seller's employees or dealing with its customers and suppliers, and ask what the limits are.
• Remedies: does the NDA say what happens if you breach it, and is that reasonable?
• Governing law: does it say which province's law applies and where a dispute would be heard?

If a term is one-sided or vague, you can ask to change it. Sellers often accept reasonable edits, especially ones that let you get professional advice.

Why the scope matters once you see the numbers

After signing, you will be looking for problems as well as strengths. That work usually involves outside people, so the NDA has to allow it. These are examples of what a buyer commonly needs to look into.

• Deal structure. Manitoba Taxation Division guidance says a sale of shares or partnership interests is not a sale of business assets that comprises a bulk sale. A share purchase generally does not attract GST/HST, and it does not change the tax values of the corporation's assets.
• Tax debts in an asset purchase. A buyer of assets who does not obtain the duplicate bulk sale certificate is liable, on assessment, for the seller's tax debt as at the date of sale. The director issues the certificate in duplicate, and the seller must give one to the buyer.
• Secured debts. Any person may request a Personal Property Registry search by the name of a debtor. A search should be run against the seller's exact legal name.
• The company itself. Manitoba Companies Office publishes instructions for searches and file summaries that can confirm a corporation's existence, directors and filings.

An NDA that does not let you talk to your accountant or lawyer about these points can leave you reviewing a business without the help you need.

Risks of signing, and of not signing

The main risk of signing is accidentally breaching it. That can happen if you forward documents to someone not covered, keep copies after you walk away, or use what you learned in a competing venture. A very broad or very long NDA makes this more likely.

There is also a risk in the other direction. Refusing to sign usually means you will not see the financial information, and you cannot judge the price without it. A sensible approach is to sign a fair NDA, and to ask for changes to one that is not fair.

Remember that an NDA protects confidentiality only. It does not tell you the information is accurate. Your own checks, and the protections you negotiate later in the purchase agreement, are what deal with that.

What to do next

• Read the whole NDA, including any attached schedules, before you sign.
• List the people who need to see the information, and make sure the NDA names them or their roles.
• Mark any clause about employees, customers or suppliers and ask what it would stop you from doing.
• Ask for edits in writing, and keep a copy of the signed version.
• Keep a record of what you receive and who you share it with.
• Have a lawyer review the NDA, and an accountant help plan the financial review.

Frequently asked questions