Should I have a lawyer review all NDAs?

August 25, 2021

by a searcher from The University of Texas at Austin - Red McCombs School of Business in Houston, TX, USA

I currently work for a PE firm where we send each NDA to our lawyers to review and make edits before signing. I realize that a PE firm has many more moving parts than a search fund given its portfolio of investments as well as other potential conflicts of interests, but it is comforting knowing a lawyer has reviewed each NDA. I understand this would be quite costly for a search fund, especially a self-funded one. But curious on what everyone's thoughts are around lawyer involvement on this front?

Thank you.

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Reply by an intermediary
from City University of New York (CUNY) System in Tinton Falls, NJ, USA

Here's my two cents. First, if you are not familiar with either NDA's in general, agree with other comments - find a good attorney and let them educate you on the structure and areas of concern. Second, if you understand NDA's and have a good grasp of the potential legal issues guide yourself on making the best modifications to protect your interests. No one but you knows if you are going to violate a covenant in the NDA. Typically the Seller's advisor will send you a pre-crafted NDA. I review over 500 NDA's a year on a bad year. It is a HUGE pain, but needs to be done because everyone has different issues, and mostly doesn't want to be hog-tied to terms if their company has tentacles in many different opportunities, with many inside directors, and many portfolio companies. Without their knowledge, they could be in violation even before reviewing anything. That being said, having an attorney review EVERYTHING all the time will cost you potentially a few hundred thousand dollars if you are very active - likely funds you don't have. So, going back to my second point, be intelligent and make sure the terms work for you and the foreseeable future. Companies like ours have standard NDA, and so many versions that its not a one size fits all, and I dread the "please see attached revisions" notices we get from PEG's every single day. At some point when there is a collective pain we can all agree to, like residential R/E contracts, someone will draft a standard NDA that encompasses almost all seller/Advisor/PEG issues, and is endorsed by the likes of the M&A Source, AM&AA, and IBBA so they can push it down to their members, and then maybe we can spend more time on getting deals done, rather than playing quasi-counsel on documents that in the long run, rarely get violated by active practitioners on both sides.

Reply by a professional
from The University of Chicago in Chicago, IL, USA

Some folks here are saying get a good form of NDA, but that doesn't account for the fact that most sellers/brokers bring the form NDA to you. Yes, you can toss it out and ask to use your own (or try to preempt by serving up your own paper in advance), but that suggests you'll be difficult and in this part of the market (the SMB/micro MM), that's a bad first impression to make. So, you might just have to take the NDA you're given as a starting point in most cases.

I agree with some earlier comments that a lawyer shouldn't need to review every NDA because a good lawyer is going to coach you on NDAs and help you understand what should be included and what should not be included and then you can learn when to use the red phone and call the lawyer. That makes it more efficient for everyone.

That said, if you're a searcher, I would encourage you to talk about how billing works for NDAs. An hourly rate may not be a good fit and leaves you (as a searcher) with a disincentive to reach out. Instead, do something on a fixed fee (whether that's fixed fee for all search activities, including NDA review or fixed fee for just NDAs (maybe up to a certain number)) or just a per NDA fee.

Personally, I think the first approach (fixed fee for all search activities) gives the best comfort to the searcher to reach out when needed, while it also gives the lawyer comfort that they'll have multiple touch points with the client to develop the relationship for the eventual deal (and beyond). I'd say that's customary in the market, too, with firms that are particularly active in the space.

Happy searching!

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