Noncompete agreements come up in several ways in merger and acquisition transactions. This post will deal with noncompete agreements with your employees and how they may affect a transaction.
When a prospective buyer looks at your business as a possible acquisition, the last thing they want to have to deal with is a disgruntled employee starting to compete with the business under the new owner. Sellers often believe that their valued employees would never do something like that. Experience, however, tells us that often can and do.
There are many reasons for this phenomenon. Key employees often believe (often rightly!) that they have played a key role in building the business that has now been sold out from under them. In addition, there have often been vague promises of “a piece of the action” that are forgotten when a deal is made.
Our advice:
1. Recognize and reward the contributions that key employees have made.
2. Remember and honor the promises you have made to key employees.
3. Protect yurself and the buyer of your business by having your employees sign restrictive covenants – now, not when a sale is imminent.
What kind of restrictive covenant is appropriate to ask your employees to sign? Employees should be asked to sign non-disclosure and non-solicitation agreements that protect confidential information and restrict employees from soliciting your customers (and employees) for a reasonable time after their employment terminates.
You may consider a “non-competition agreement” that restricts the employee’s ability to compete against your business or a successor entity for a period of time following termination for any reason. This is a more complex topic than non-disclosure and non-solicitation, but it may restrict the employee’s ability to stay in the same occupation. The enforceability of non-compete agreements varies widely from jurisdiction to jurisdiction, especially if there is little or no consideration for entering into the noncompetition agreement. It is far easier and better to oibtain such an agreement when an employee first joins your business than later on.
In connection with the sale of your business, t is highly likely that you will be required to enter into anncompetion agreement. Such agreements usually are enforceable in coinnection with the sale of a business (if they are reasonable in duration and territory). You may also be held accountable for the competitive acts of your former employees, so it is a good idea to protect yourself as well as you can by having employees sign noncompetition agreements.
Next: Noncompete Agreements Part 2 -Negotiating your noncompete agreement in connection with the sale oif your business.