Are you thinking of entering a partnership? While it could be a smart move for your business, make sure you protect your business trade secrets before you enter too deeply into negotiations, just in case the potential partnership falls through.
A partnership is a contractual entity where two or more persons agree to provide capital and labor for a business enterprise and where each shares a portion of profits and losses. By combining operations, partners usually enjoy much more profit and success than do sole proprietors on their own. In other words, in cases of successful partnership synergies, the whole becomes much greater than the sum of its individual parts.
This article considers a pitfall you as a sole proprietor may face when looking to acquire partners with whom you can work with to expand your business, for mutual benefit. As a general rule of thumb, each partner should approach negotiations for creation of the new partnership carefully. Each negotiator must agree on their respective contributions to the business, responsibilities in operations, sharing of profits and benefits, and duties in dissolving and winding up partnership affairs if they must break up the business.
An important first step in partnership agreement negotiations is a confidentiality or non-disclosure agreement. Having a non-disclosure agreement will allow you to protect sensitive or valuable information or trade secrets that you don’t want widely known. Examples of sensitive information can include a sales plan, a customer list, a fabrication process, a formula for frequent calculations, or a unique recipe. All of these things could be so important for you to remain competitive that their disclosure would be a considerable business setback.
At this point you may be asking yourself, why would anyone reveal something that could hurt your business if disclosed anyways? Well, during negotiations over a prospective partnership, revealing valuable trade secrets may be what convinces the other side that the partnership would be the best thing for them. However, if for any reason the negotiations fall apart after the secret was disclosed, the disclosure intended to induce the other side could backfire because your valuable trade secret is now out of the bag and potentially exposed to competitors.
Consider this example- the sole proprietor of Kelsie’s Donut House has a secret family recipe for donuts so tasty that customers line up at all times of the day for them. She is looking for more capital to expand her business so she opens negotiations with prospective limited partners with deep pockets. How does she induce them to invest in her business expansion without telling them about the donuts and risking loss of confidentiality for this secret information?
A non-disclosure agreement executed before negotiations on the prospective partnership prevents unnecessary risk and will allow Kelsie to keep her secrets safe. It also opens up legal remedies for misuse or disclosure to the wrong parties if the information were to be leaked to her competition.
It is important that the non-disclosure agreement clearly define what must not be disclosed. For example, it should spell out that information in any document marked “confidential” or any information expressed verbally followed promptly by a writing claiming confidentiality for it should not be disclosed. All parties receiving confidential information should agree not to disclose it without prior written permission and to return all records of confidential information promptly if requested. The non-disclosure agreement should remain in effect until the party revealing the confidential information informs the receiving parties that the need for confidentiality no longer applies. Consultation with an attorney confirms the clarity, precision, and enforceability of all non-disclosure agreement clauses.
If you are a sole proprietor or individual owner planning for expansion, make sure you put a non-disclosure agreement in place to govern potential partnership negotiations. Doing so allows you to negotiate your terms freely and with the peace of mind that can only come from knowing your confidential business information is protected.
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Keep in mind that this information is provided to help you make more informed decisions about your business but does not represent legal advice. We always recommend that you speak with an attorney should you have any questions or need more clarity on this subject.
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