In this article I address business sale issues relating to employment agreements and related documents, including confidentiality and non-compete clauses. For information on other issues and concerns in a business transfer, please see my article, Buying or Selling a Business in Maryland.
A business transfer’s success or failure often depends upon retaining the company’s employees and their knowledge of the business. Many times, a company’s most valuable employee is its soon-to-be former owner. Further, the buyer must consider the company’s obligations to the employees and consider whether employee departures could harm the company. Of course, the seller showing confidential company information to prospective buyers has concerns as well.
Agreements for Employees:
Generally, businesses will limit their employee obligations through employment agreements. Companies often require employees accept confidentiality agreements, non-compete agreements, and non-solicitation agreements. Confidentiality agreements restrict persons from sharing information, while non-compete agreements restrict the person from working for a rival. Non-solicitation agreements limit the employee’s ability to encourage fellow employees to follow them to a new employer. In addition, employment agreements should limit an employee’s ability to claim ownership of their work-product, such as client lists. As a buyer of a business, you cannot assume your predecessor properly protected the business.
The buyer should analyze the company’s employment contracts and related agreements. Inevitably, some employees will either be dismissed or leave following an ownership or management change. But do not focus solely upon those employees. The buyer’s attorney should review all existing contracts and determine whether the company will need new employment agreements.
Further, the buyer’s attorney should be asked to determine whether the current contracts create any contractual commitments to these employees, particularly any clauses overriding employment-at-will laws or granting severance packages, sometimes referred to as “golden parachutes”. Other contractual obligations the business buyer can inherit include previously agreed upon compensation, bonuses, and fringe benefits.
Non-compete, or noncompete, agreements can be crucial to preserving a business. It is not only salespeople who are worthy of a non-compete agreement. Any employee with knowledge of your business, its contacts, or its processes could be a valuable asset to your competitor. The laws regarding non-compete agreements are extensive and vary greatly from state-to-state. The slightest mistake can make the non-compete agreement unenforceable, so I suggest seeking professional assistance.
Agreements for Sellers:
On a positive note, employment agreements or consulting agreements are sometimes used to retain an otherwise departing owner. Rather than compensating the owner outright through a lump sum or installment payment, it is often worthwhile to keep the seller involved to make the ownership change less shocking to the business and its partners. The seller may not be thrilled to remain active in the business, so the consulting agreements should consider delegating specific functions or tasks as a requirement for the employment or consulting agreement.
The seller should be required, as part of the sale, to agree to confidentiality agreements, non-compete agreements, and non-solicitation agreements. No matter how intent the seller is to leave the business, the buyer will want to protect their interests should the seller have a change of heart.
Agreements for Buyers:
Finally, the business seller should consider requiring prospective buyers sign confidentiality agreements. During the business sale process, the seller will be disclosing sensitive business information. This could be particularly damaging if the potential buyer is in the position to use the information.
For further information, please contact Jeff Rogyom at (410)929-4578.