TAS Tips: Non-Compete Agreements

By Steve Michaels

The following is an ongoing segment featuring real life telemessaging industry transactions. This month’s installment explores what can happen when your employees haven’t signed non-compete agreements.

Scenario: A telemessaging company owner in New Jersey purchased some accounts from a competitor. The staff had not signed non-compete agreements and within a few short weeks had gotten together, purchased some equipment, and taken back 90 percent of the acquired accounts.

Problem: The buyer did not check to see if the seller had made his employees sign non-competes. This could leave the buyer open to losing the accounts he had purchased to operators from the seller’s former business.

Recommendation: The solution seems simple – have your employees sign a non-compete agreement at the time they are hired. Most non-compete agreements also include language pertaining to the non-disclosure of client information and should cover trade secrets, price lists, manner of operation, and any other information pertinent to the business. Make such agreements part of the paperwork your employees sign when they are hired. The agreement should have an enforcement period of at least two years after the employee leaves the company. If your employees have not signed non-competes and you are thinking about selling in the near future, I would recommend that you present them with the document on pay day, explaining that your CPA or insurance company requires them to sign it. Some non-compete agreements are weak; you should always have an attorney review them. For example, one service purchased accounts in California and the employees had signed non-competes, but the document was so weak that an employee posted flyers advertising her new competing service on telephone poles in the area. When confronted by the buyer, she simply said that clients had responded to her flyer. Of course, the buyer could have subpoenaed all those clients to see if they were indeed solicited by the ex-employee, but would these clients still opt to go with the buyer after such an ordeal? Most of the time, the buyer is seen as the bad guy because the clients are loyal to staff members from the old company.

Another disaster occurred in Colorado when a service bought out its competition and the owners, who had signed a non-compete for five years and within a 100-mile radius, sold their equipment back to the employees. The employees took back more than 75 percent of the customer base, which resulted in a long legal battle.

When buying an account base, always ensure that all principles and employees sign non-compete agreements. If it is a family-owned business, make sure that any relative who could possibly take over the business also signs a non-compete. Try to hold back at least 10 percent of the sale price for 30 to 60 days to combat any unforeseeable circumstance that may arise from the purchase. If you are purchasing the accounts only, one way to guarantee that the employees will not go back into business with the seller’s equipment is to specify in your agreement that the seller’s equipment must be sold outside a 100-mile radius or outside the state.

In the acquisition of customer accounts, the non-compete goes with the client base, not the business, so even if a competitor purchases the customer list, the non-compete agreement with the employees is still in force. The overall concern is what your current employees may do after they leave your company, but you should also be concerned about those employed by the company that you are purchasing, whether you are keeping the location open or not.

Steve Michaels and TAS Marketing have been serving the TAS industry in the mergers and acquisitions arena for over 23 years with over 220 businesses sold. His years of experience have widened his scope and experience in buying and selling businesses nationwide. He may be contacted at 800-369-6126, tas@tasmarketing.com, or visit www.tasmarketing.com.

[From Connection MagazineMay 2003]

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