3 Hidden dangers of private equity NDAs and how to avoid them

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Contract Automation

A poorly managed non-disclosure agreement (NDA) process can delay or ruin a possible private equity (PE) deal.

Businesses can characterize a mismanaged NDA process as numerous rounds of revisions, strong disagreements over requested provisions, delayed responses to calls and emails, or an overall slow turnaround time. Internally, asset managers might struggle with assigning ownership of NDAs and responding quickly to communications due to their in-house lawyers’ and deal professionals’ workloads.

A lengthy or disagreeable NDA negotiation could prematurely push a seller or buyer out of the deal process despite the benefits of the potential transaction. However, that outcome is avoidable through contract automation and legal outsourcing.

1. Slow NDA turnaround times delay due diligence

An inefficient NDA process puts asset managers at a disadvantage in terms of gathering material information and competing with other firms.

After PE managers establish private equity fund strategies and begin sourcing deals, they want the ability to efficiently transition from interesting teasers to NDAs. Managers are most concerned with their ability to conduct due diligence promptly, which requires a quick NDA turnaround.

Unfortunately, many circumstances can hinder NDA execution, including:

  • A lack of clear internal processes and ownership of the NDA on either the buyer’s or seller’s side.
  • Waiting on general counsel or an outside law firm to answer questions.
  • Lacking an efficient collaboration environment or contract management solution to execute the NDA.

While a seller’s delay might equally disadvantage numerous PE funds, a buyer’s inefficiencies put it at a disadvantage compared to PE managers that turn around NDAs quickly.

2. Poorly managed NDA negotiations create reputational risk

A private equity NDA often sets the tone for what it will be like for the two parties to work together, and a challenging process can create a preference in one party to work with someone else.

Depending on a PE manager’s processes and internal bandwidth to manage a high volume of NDAs, the firm might rely on deal professionals or outside counsel to negotiate these agreements. Unfortunately, either situation can have negative consequences.

Unprepared deal professionals might not fully consider future risks to the firm when agreeing to NDA provisions. Outside counsel might be better prepared to consider risk but are often unresponsive, fail to understand terms material to the business teams, or are too rigid during negotiations.

3. Rigid NDA terms can prematurely end the PE deal process

A party out of touch with current market dynamics and unwavering in its demands can knock itself out of the PE deal process prematurely.

For example, a PE firm might call for particular terms, such as a residuals clause, that a target company would reject. Or a target company might include provisions in the NDA that raise red flags for potential buyers, such as:

  • Limiting a PE firm’s conversations with industry contacts
  • Requiring too long of a duration
  • Demanding an over-inclusive non-compete provision
  • Including a unilateral attorney’s fees provision
  • Choosing an inappropriate state for governing law and venue

Either party’s refusal to consider reasonable alternatives may be the death knell for a potential deal between them. Consequently, there’s one less potential bidder in the seller’s auction process, and the buyer has one less deal to consider.

How to never let NDAs get in the way of a deal

With the right technology and processes, PE firms can efficiently manage the NDA process. | Ontra

Define the PE NDA workflow

PE firms can improve the speed at which they turn around NDAs through several tactics. The first is to develop a defined process, including determining ownership, decision-making power, and escalation points.

At this stage, it’s essential to evaluate the firm’s bandwidth to manage NDAs. Defining the NDA workflow won’t speed up the process if the firm continues to overburden in-house resources or rely on outside counsel.

The solution is to consider legal outsourcing when routine agreements pull in-house lawyers or deal professionals away from mission-critical work. Ontra’s human-in-the-loop (HITL) contract automation solution combines artificial intelligence (AI) and a global network of law firms that reliably process NDAs in a short turnaround time.

Adopt legal technology

Another tactic for improving speed and efficiency is adopting contract management software. Within Ontra’s HITL contract automation platform, experienced professionals accept or reject the platform’s AI-based suggestions during NDA negotiations, providing a continuous feedback loop to improve Ontra’s models and accuracy.

Firms gain a centralized collaboration environment, contract status tracking, automatic notifications, an eSignature integration, and centralized legal document storage. With the help of contract AI, the platform offers a smoother experience for all parties involved.

Prioritize professionalism

Because asset managers consider NDAs to be a routine contract type, they may underestimate their importance at the beginning of a new relationship. While a mismanaged NDA process can tarnish a firm’s reputation, an efficient process can boost it.

It’s helpful to put NDAs in the hands of lawyers who can see them through from start to finish. Firms that don’t have the bandwidth to insource NDAs or the desire to pay expensive outside counsel can gain consistency through a legal outsourcing provider. While in-house counsel and deal professionals focus on high-value tasks, freelance lawyers can quickly respond to other parties’ questions and concerns.

Take a commercial approach

Firms can foster an efficient process through an NDA playbook that outlines preferred and fallback terms. When establishing the contract playbook, firms have the opportunity to review what is commercially appropriate.

Ontra’s HITL contract automation platform includes a global network of corporate lawyers who have collectively processed over 500,000 agreements. This deep experience can offer unique insights into the market that other platforms can’t provide. Firms can then define their ideal and acceptable positions, enabling their in-house lawyers, freelance lawyers, or deal professionals to negotiate within reason.

Additionally, Ontra’s contract automation solution enables firms to monitor terms across their NDAs. Keeping track of these terms not only promotes proactive investor obligation management, it also enables firms to leverage precedent in future negotiations.

Automate your private equity NDAs