Have non-competes been banned for sellers, or just employees?
April 23, 2024
by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Austin, TX, USA
For those of you that might not have heard, the FTC has made a rule that bans new non-competes for workers going forward and nullifies current non-competes for non-senior executive employees.
https://www.cbsnews.com/news/ftc-noncompete-agreement-ban/
Setting aside whether or not the courts will rule that the FTC has this rule making ability or whether this should have gone through the legislature., does anyone know whether this impacts the non-compete provisions put in place when someone sells a business?
from University of Tennessee in Nashville, TN, USA
I assume most of the legal community in the M&A space are reviewing the ruling thoroughly and have not had time to fully assess the overall impact on transactions. While it appears that owners who sell their businesses are likely still subject to non-competes, given that they are not the 'employees' targeted by the ruling, all other employees cannot be bound to such agreements. For Searchers, this can create a significant shift in risk when acquiring smaller operations if specific employees are deemed to be vital to continuing operations and/or have hard-to-find specialized skills post-transaction.
"Treat your employees well and they will reward you" will carry much heavier gravitas than before if the ruling is allowed to stand in the long-term. This may translate to lower cash flow for owners and lower multiples for businesses in the future, but it's way too early to assess the total impact. Having seen the blatant greed of some Sellers and Advisors/Brokers as of late, diminishing multiples may be wishful thinking but the increased risk to the Buyer is real moving forward. Capital providers may be unwilling to fund the additional risk that was previously mitigated by employee non-competes, especially in instances where the Buyer has no prior industry experience, and may instead reduce funding capacity.
from The Johns Hopkins University in Basking Ridge, NJ 07920, USA
That said (a) such sales are still subject to state law, (b) restrictive covenants are always fact specific, and (c) as always, we will have to see how this is interpreted by the courts.
Definitely consult with counsel to discuss specific concerns including non-competes for key employees coming along after the sale of a business which require a separate analysis and will likely raise concerns.