What You Need to Know About Non-Competition Agreements

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The Value During the Sale of a Business

by Jim Borchers

Ever hear this: “Non-compete agreements are not worth anything.” It astounds me how many people believe this. Just the opposite is true. Repeat, the opposite is true. Non-compete agreements are commonly used in two contexts: (1) sale of a business (i.e. the seller/owner agrees not to compete after the sale) and (2) for employees and independent contractors. (We’ll cover the latter in the next issue.)

Non-compete agreements are a routine part of any business sale. If your business is a corporation or an LLC, then you, as the key employee and owner/shareholder, will be expected to sign a non-compete agreement. If you are the buyer, you have every right to expect a strict non-compete from your seller’s shareholder/owner(s); and in larger transactions the key employees may be required to sign one as well.

In a business sale, the non-compete must be separately purchased, i.e. the person who agrees not to compete must be paid directly for that commitment. Therefore, if you are a buyer, be certain that a separate check goes to each person who signs a non-compete. If you purchase from an entity (i.e a corporation or LLC) remember that the shareholder/owner/employee who agrees not to compete is not the seller. Therefore, you need a separate non-compete agreement with each of those people individually even if your purchase contract is with a sole shareholder/owner.

As the seller, you may think, “I’ve heard these non-compete agreements aren’t worth anything, so I’ll just sign it to go along”. Then you discover a year later that your buyer didn’t keep all of your employees (as he promised), and he’s started selling inferior products or services. A couple of customers call and say, “It’s not the same. We need you back.” You can’t stand “your” business being run that way. You never treated your customers like this. You need to get back into the market to put “honesty” back into the industry. That non-compete agreement shouldn’t keep you on the sidelines while your old customers are being cheated right? .... WRONG. Courts have absolutely no sympathy for former owners who have a change of heart. Non-compete agreements are enforceable.

Non-competes for Employees and Independent Contractors

In the first article we talked about non-competes in the sale of a business. In a business sale, the non-compete must be separately purchased, i.e. the person who agrees not to compete must be paid directly for that commitment. But for employees (or independent contractors) no such “purchase” is necessary. In Missouri an employer may say, “Sign this non-compete agreement or you are fired,” and contrary to what many think, these agreements are valid and enforceable.

If you have a key employee, where do you think he or she will go after leaving your employment? That’s right, your biggest competitor and your customers. You have every right to protect your customers with a non-compete agreement designed to give you a legitimate unfettered right to keep a good relationship with your customers before a former employee tries to “steal” them.

But you say, “It’s illegal to prevent someone from getting a job.” A non-compete agreement that is reasonable in time and distance is enforceable. So, what’s “reasonable” you ask? It depends on the employer’s geographic customer base. Let’s say that you sell shoes in St. Charles, Jefferson and St. Louis counties. Could you enforce a non-compete in those counties for the sale of shoes, i.e. prevent your former salesman from being employed as a shoe salesman in those counties?

Yes, absolutely. Does it prevent your former salesmen from getting a shoe sales job outside of those three counties ... no. Protecting your customer base in Missouri is not preventing your former employee from gainful employment under the law of non-competition.

The Contents of a Well-Drafted a Non-competition Agreement

Non-competes are often misunderstood and viewed as dreaded creatures designed to put people out of work. But they can be simple and fair. Remember the purpose is not that complicated. It’s to prevent a former employee or independent contractor from hustling your customers. It should be designed to give you time to readjust and keep your customers in the fold without interference or stress from a disgruntled former employee.

Non-compete agreements may include the following restrictions: (1) no solicitation of current customers, (2) no competition for new customers within the non-compete area, (3) no employment by a competitor (4) no solicitation of your employees, and (5) non-disclosure of
confidential information. If you terminate an employee without cause (2) cannot be enforced.

Can you get damages for violation? Yes, but proving them may be very difficult. So, the critical element of any non-compete is the right to stop the violator, quickly. A well written non-compete should allow you, the employer, to swiftly obtain a court restraining order stopping the violator and have the violator pay your cost of enforcing the agreement. Lastly, be certain that your non-compete agreement includes a penalty that extends the non-compete period if there is a violation.

It may take time for you to discover the violation and the violator may just stall you to see if he can run the clock out. The extension penalty prevents the violator from using your time against you. Use a reasonable time and distance. Don’t be greedy, and explain the purpose to your employee. Caution: forms from the internet are not your friend. Non-completes are not expensive and can be drafted by an attorney to fit your business.

Jim Borchers is an attrorney with the law firm Evans & Dixon.  He can be reached at jborchers@evans-dixon.com