IN the current climate of increased corporate activity, many more businesses are finding that buyers are making offers for their companies.

Upon receiving an indication of interest from a potential buyer, one of the first things that a company should do is put in place a confidentiality letter, which is sometimes referred to a non-disclosure agreement.

A confidentiality letter is a legally-binding document signed by both parties.

It aims to ensure that the potential buyer does not disclose any information they are provided with as a result of negotiations and initial due diligence.

For a variety of reasons, the owners of many businesses thinking of selling will want to keep even the mere fact that negotiations are taking place confidential.

Confidentiality letters are commonplace, so if a potential buyer refuses to sign one, this should set alarm bells ringing.

The signing of such an agreement is an important act of good faith and refusal could suggest that the buyer is not really interested in purchasing the business, but rather just having a look at the seller's customer lists, contracts and the like.

There is a good chance that a potential buyer may be in the same industry sector as the seller. Sellers therefore need to be acutely aware of competitors undertaking such "fishing trips".

In reality, confidentiality agreements are difficult to enforce and buyers should not let themselves be taken in by a belief that, just because they have signed such an agreement, they are protected completely.

Enforcing a confidentiality agreement will involve recourse to the courts and exposure to the inherent uncertainty that is involved in all litigation.

Confidential and sensitive information should therefore only be released after careful thought is given to the implications of releasing the information, and on the basis of a firm belief that the buyer is genuine.

However, confidentiality agreements still have a strong moral force and buyers that breach such agreements soon find that they gain a reputation within their industry and among professional advisors.

Many of those selling their business will be doing it for the first (and only) time and it is therefore wise to consult with professional advisors at an early stage.

* Ross Paterson is a solicitor in the business and company law team at Blackett Hart and Pratt in Darlington. For more information, contact him on (01325) 466794.