Transferring Intangible Assets: Playbook for Selling the Knowledge-Based Enterprise - Negotiating the Deal

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[This article is part 5 of a 12-part series covering the key elements involved in the sale of IP-based and professional services businesses. The next article in the series will be “Due Diligence.”]


Most aspects of negotiations for the sale of a Knowledge-Based Enterprise (“KBE”) primarily involve business strategy and financial considerations.  However, input from legal counsel during the negotiation process is important to facilitate candid and meaningful discussions in a manner that protects valuable proprietary information.  In addition, if negotiations are successful, the result will often be a written term sheet or “letter of intent” (“LOI”) outlining the key deal terms.  Although the LOI is primarily intended as a guide to the creation of a purchase agreement and other deal documents, the parties should consider a few important legal issues before signing the LOI.

The purpose of this article is to discuss some of the legal issues, documents and strategies involved in negotiations for the sale of a KBE.

Non-Disclosure Agreements

Prior to entering into any substantive negotiations with a potential purchaser, the KBE seller should require the purchaser to execute a non-disclosure agreement, or “NDA.”  An NDA will ensure that the discussions related to the deal will remain confidential. In addition, it will allow the KBE seller to share business and financial information without worrying that it will be disclosed to others.

Although NDAs are sometimes “one-way NDAs”, meaning that the provisions only limit disclosure by one of the parties, in the context of a proposed KBE sale most NDAs are “mutual”, meaning that they require each party to keep the information shared confidential. 

Key elements of an NDA include:

·     Definition of what constitutes confidential and proprietary information

·     Exclusions to the definition of confidential and proprietary information

·     Whether confidential and proprietary information must be in writing and labeled as “confidential”

·     Prohibitions against disclosure to others

·     Exemptions to the prohibition against disclosure, and the requirement of notice to the other party prior to disclosure

·     Prohibitions against use and reverse-engineering

·     Ability to obtain an injunction

·     Expiration of the NDA and confidentiality obligations

Finally, the choice of law for the NDA can be important, as the application of the laws of different states will affect how the NDA is interpreted and enforced.

Some NDAs can include additional provisions prohibiting the receiving party from using or reverse-engineering products, poaching vendors or employees, or even competing in the industry.  These provisions go beyond the scope of a standard NDA but may be warranted if one of the parties feels they are necessary to protect their interests.

However, NDAs do not guarantee protection against disclosure. Common exemptions include situations where a court or government agency requires disclosure, or where the information becomes public and is thus no longer confidential. In addition, a breach of an NDA would require a party to pursue legal action against the other party, which can be costly.  Moreover, legal action after an NDA breach could be “too little, too late,” as it can be difficult to undo the damage caused by an improper disclosure.

Ultimately, the purpose of the NDA is to create an environment in which both parties are comfortable having candid discussions and sharing sensitive information that is necessary to the proposed deal.  As such, they should contain all the provisions the parties deem essential to create that environment. 

Experienced legal counsel can assist KBE sellers in preparing and reviewing an NDA that is appropriate for their situation.

The Letter of Intent (LOI)

When a KBE seller and potential purchaser have agreed on most of the key elements of a deal, they typically will prepare an LOI to confirm their mutual understanding of those elements.  Once finalized, this LOI will serve as a blueprint for the creation of the purchase agreement and other transaction documents needed to complete the deal.

 Although the LOI is designed to be merely an outline of the deal, the LOI, once signed by both parties, is a legally binding agreement. Thus, it is important that both parties clearly understand what obligations the LOI creates.

Therefore, in addition to outlining the key deal terms, some key legal issues to be addressed in the LOI include:

·     A clear statement that the LOI is an outline of deal terms only, and that neither party is obligated to close on the transaction until detailed transaction agreements have been negotiated and executed by the parties

·     A confidentially statement related to the deal and the specific terms of the LOI

·     A “no-shop” clause that prohibits the KBE seller from negotiating with other potential sellers for a limited amount to protect the purchaser from a “bidding wa.”

·     Sets a proposed closing date and, more importantly, an expiration date for the LOI if the parties haven’t completed all the transaction agreements in time

Finally, in most cases, the expense incurred by the purchaser during the transaction and diligence process will be significantly greater than the KBE seller’s expenses.  As such, the purchaser may also require that, if the purchaser is ready and able to close on the deal and the KBE seller changes its mind, the KBE seller will be obligated to pay some, or all, of the purchaser’s expenses.    

Because some elements of the LOI create legally binding obligations, KBE sellers should consult with experienced legal counsel prior to executing an LOI.

As this article explains, although attorneys may not be involved with many of the business and financial aspects of deal discussions for the sale of a KBE, input from legal counsel during the negotiation process is important to facilitate meaningful discussions in a manner that protects sensitive information and aids in the creation of an LOI that can serve as a blueprint for the deal.    


About the Author:

Jim Chester is a 20+ year business and technology attorney, professor, and entrepreneur.  He is a recognized authority in buying and selling technology businesses, global technology transactions, and providing strategic legal counsel for innovators and industry disruptors.  For more on Jim, visit here. He may be reached at

To view the previous articles in this 12-part series:

1 - Transferring Intangible Assets: Playbook for Buying & Selling Knowledge-Based Enterprises

2 - Transferring Intangible Assets: Playbook for Selling a Knowledge-Based Business - Overview of the Process

3 - Transferring Intangible Assets: Playbook for Selling a Knowledge-Based Business - Preparing for the Sale

4 - Transferring Intangible Assets: Playbook for Selling the Knowledge-Based Enterprise - Finding Buyers

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