EVEN in the difficult economic climate we currently face, business people are still receiving and making offers to buy 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 (sometimes called a non-disclosure agreement).

It is a legally binding document signed by both parties. It aims to ensure the potential buyer does not disclose information they are provided with as a result of negotiations and initial due diligence.

The owners of many businesses thinking of selling will want to keep confidential even the fact that they are considering selling and that preliminary negotiations are taking place.

Confidentiality letters are commonplace.

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”.

Confidentiality agreements are difficult to enforce and buyers should not be taken in by a belief that just because they have signed such an agreement they are protected completely. They should also protect themselves by limiting and monitoring information provided to a potential buyer. Enforcing a confidentiality agreement will involve recourse to the courts and exposure to the inherent uncertainty involved in all litigation.

Where the confidential information is already in the public domain, it cannot be made secret again. It would be likely that damages for breach of contract would be the only legal remedy available. However, this is unlikely to provide much comfort, especially where the confidential information has a high potential future value.

Confidentiality agreements do still have a strong moral force and buyers who breach them soon find that they gain a reputation within their industry and among professional advisers.

■ James Wharton is a solicitor in the law team at BHP Law. Call him on 01325-466794.