Why Use Non-Compete Agreements!

Non-compete agreements (NCA) represent a separate agreement. They could be in an employment contract, or as a separate article in a buy and sell agreement. Sometimes they are referred to as Covenants not to complete. “

This is based on the possibility that an employee can do harm to a company upon termination.  They could know sensitive information about the company’s operation, owners and employee’s personal information, special operations, and proprietary information to a competing advantage, along with so much more.

Picture a very long-term employee working side by side with the owners, for many years, and then leaving to work for the owner’s competitor.  Certainly, there can be issues.

No compete agreements (NCA), can be used to retain employees also.   It would be very difficult to change jobs within an industry or profession when the leaving employee is limited to compete in a geographic and specific industry for a period of time.  However, non-compete agreements are hard to enforce, because in many instances the agreement has overreached and is very broad in the definition of industry and geographic coverage.

An NCA is vital to have for a key person, especially if you feel you will be selling your business in the future.   Picture the business is about to be sold and your key person decides not to sign an employment agreement with the new owner and holds you hostage for part of the sale amount?  Don’t laugh, it happens.

NCA can be tied to the operation of buy and sell agreements also. Remaining stockholders have no interest in funding a former stockholder, who ultimately could be in competition with them.  This becomes more important considering that the departing stockholder was a key person in the firm and has access to company secrets and information.

Council should recommend that the owners consider having a requirement that departing owners who sell their shares back to the company, sign an NCA prior to departure, or before payment for the stock is completed.

Even though an NCA can be separate agreement, it would be wise to insert this agreement when designing the buy and sell agreement.  It is at this time that all parties are together and of like mind to discuss the terms of this part of the agreement. This is the time where each member thinks it will be the other person leaving, consequently, they have the mentality to protect their interest in the business.

Buy and Sell agreements are designed as a means of transferring ownership, predetermined circumstances can be a challenge.  Buy and Sell agreements need to be workable so the remaining stockholders don’t find themselves negotiating under adverse circumstances with former stockholders, which could be their family and friends, or their estates.

By placing the proper elements in the document in the beginning, there is a roadmap which all parties agreed to when all parties were on equal footing, and before the triggering event.

Since each state may have their own variation of a non-compete agreements, consequently, council should be involved when designing the agreement.

 

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