Alternatives to Non-Compete Agreements

Your employees are a key asset to your business. To maximize the value of your business, you must protect the nature of these relationships. 

To do this, consider asking your key employees to sign a non-compete agreement, if they’re legal in your state. Sometimes employees threaten to leave when they hear you’re selling your business, and some may threaten to open a competing business and steal your customers, or desert to a competing business. A non-compete can greatly reduce the risk of this happening. In certain states, non-competition agreements in an employment context are illegal, though they are legal in all 50 states in the context of buying a business. If your business is located in a state where this is the case – California being the most notable example – there are two primary alternatives for protecting your interests.

1. Non-Solicitation Agreement: A non-solicitation agreement prohibits an employee from soliciting your employees or customers, but it doesn’t prevent them from competing with you as long as they don’t solicit your employees or customers. Non-solicitation agreements are most common in service businesses that have strong customer relationships. The major advantage of non-solicitation agreements is that they may be legal in states in which a non-compete is illegal. 
2. Non-Disclosure Agreement: At a minimum, all employees should sign a non-disclosure agreement. An NDA prevents employees from disclosing trade or other secrets to your competitors. They can also make it so difficult for the employee to comply with the NDA that the employee, or the employer, may pass on certain opportunities to avoid violating the terms of the agreement. The major advantage of confidentiality agreements is that they can be designed to protect your business’s confidential information throughout the sales process, and they are much easier to enforce than non-compeition agreements.

Collectively, a non-solicitation agreement and NDA serve as highly effective psychological deterrents. Deterrents are often more effective than other means – just ask anyone who owns a Doberman or has an ADT Security sign in their front yard. Next, I’ll cover these deterrents in more detail.

Non-Solicitation Agreement

A non-solicitation agreement can be a stand-alone measure, or it can be included as a component of another agreement, such as an employment, non-compete, or non-disclosure agreement. 

This is often an effective enough means to prevent your employees from competing with you, as it may prevent a band of employees from grouping together and poaching your customers. Additional measures can be created to strengthen the non-solicitation agreement. Past or future bonuses can be retracted or withheld if they violate the terms of the agreement. For example, if five of your employees band together to start a competing business, you could withhold any bonuses or other payments if they violate the terms of the non-solicitation agreement. 

Non-solicitation agreements can also serve as a form of protection if the employee leaves to work for a competitor. But your agreements need to be properly drafted for these mechanisms to be enforceable, so be sure to hire an attorney with significant experience in this area. 

Non-Disclosure Agreement

If you employ someone who has access to trade secrets related to creating your product and a competitor hires this individual, a signed NDA will prohibit that person from disclosing your trade secrets to their new employer. If the potential new employer learns your employee has a signed NDA with you, they may pass on hiring this individual due to the risk associated with doing so.

An NDA can also protect other information as well, such as:

• Customer names
• Prospective client information
• Pricing information, if private
• Financial information
• Employee information, such as names, salaries, and benefits
• Intellectual property, such as software code, designs, and technical processes

It’s important to note that in order to protect the information mentioned above, your NDA should contain a clear definition of “Confidential Information.” If you wish to protect specific elements of your business, clearly spell those out in the agreement. You should also check to make sure they’re transferable or assignable to the buyer when you sell your company.

Conclusion

Employees are a key asset of any business. To maximize the value of your business, you must protect the nature of your relationship with them. This is especially true in the event of a planned sale.

As you can see, one of the most delicate decisions to make during a business sale is the timing of when to tell your employees. You need to determine the best way to approach this for your situation and consider your relationship with your employees and personal advisors. Obviously, word will get out eventually, but if you maintain control of the timing and the process, you can use this critical stage to your advantage. Be prepared for the unexpected, consult with your advisors, and make plans to help the sale unfold smoothly and successfully for everyone involved. 

If you have a trusting culture at your company, you may consider informing your employees of a pending sale early in the process. Your staff will most likely appreciate the vote of confidence you display by sharing with them news of such a monumental nature, and you’ll have time to build even more trust and prepare them for what’s to come. Furthermore, any apprehensions on the part of the buyer will likely be lessened if they know the staff is mentally and emotionally prepared for a change in ownership. If, on the other hand, you’re concerned that one or more key employees could sabotage or otherwise undermine a sale, it may be best to wait as late as possible before cluing them in – up to and including the day of the closing.

Non-competition agreements are another tool you can use with your staff to protect the value of your company. If a non-compete is illegal in your state, or if asking your employees to sign a non-compete is impractical, you have two sound alternatives – a non-solicitation agreement and a confidentiality agreement. Both can be effective in helping to protect your business’s value.