Seeking Advice: Addressing Employee Non-Compete Concerns
August 20, 2023
by a searcher from Louisiana Tech University - College of Business in Houston, TX, USA
Hello everyone,
I'm currently in the process of negotiating the acquisition of a vehicle repair shop. While the owners are willing to sign a non-compete agreement as part of the deal's closure, I'm also considering the idea of requiring the General Manager (GM), who essentially oversees the business operations, to sign a non-compete clause. However, the broker has indicated that it's uncommon for employees to sign non-compete agreements and there's a possibility that the GM might refuse.
I view this as a significant risk, as there's the potential for the GM to leave after the ownership transition, possibly taking valuable technicians and customers with them. The broker's suggestion is to have all key employees sign employment agreements once I've assumed ownership. While this is a potential solution, it feels like a reactive measure rather than a proactive one.
I would greatly appreciate practical advice on how to address these critical concerns before finalizing the deal. I believe it's important to find a way to mitigate these risks before the closing papers are signed, rather than dealing with them after the acquisition has already taken place. Your insights would be invaluable in helping me navigate this situation effectively.
from University of Tennessee in Nashville, TN, USA
Pre-LOI, you could make your offer contingent on the GM signing an employment agreement with you. The next paragraph will explain why I don't advise a non-compete contingency. Post-LOI, the broker has a valid opinion although you could always attempt to re-trade/negotiate new terms. I don't advise the latter strategy unless it would be a deal-breaker not to have the non-compete agreement in place.
Any employment agreement(s) drafted could incorporate a non-compete clause(s). Employment laws vary state-to-state relative to the enforceability of employee non-competes but, generally, compensatory consideration provided to the employee at contract execution helps affirm an exchange of rights. Even then, enforceability still may be challenged and there is a growing resistance to employee non-competes nationally.
The better option would be to incentivize the employee(s) to stay in a form created at and of your own discretion. Enhanced work environments, amenities, base compensation, bonuses, PTO, profit-sharing plans, ghost-equity, ESOPs, and other creative options are available. Sometimes, it may be as simple as better work-day scheduling that entices an employee to remain in place post-close. Your understanding of the company's culture and employee sentiments will guide you in your decision-making.
The wonderful world of business ownership has norms, and possibly industry standards, but no hard-and-fast absolutes. The competition isn't just direct for customers but also direct versus every other employer that may entice your employee(s) to consider alternative company affiliation. As much discussion and disruption that AI, robotics, and technology have brought to human capital decisions, business is and always will be about people first.
I believe that if you treat your employees well that they'll return the favor and treat your business well, which will then make you WELLthy.
from The University of Chicago in Chicago, IL, USA
1) Non-compete are difficult are in many states not allowed. Non-solicitation is allowed. Employees have to be paid to sign NC/NS.
2) In an Asset purchase, you have to get all employees sign an employment agreement with NewCo. You can adjust the language but make sure that the seller has one in place. If he does not, you will upset few employees. Most do not know have a counsel. They talk to their family/friends. You may create bad-will on day one.
3) You can get them to sign NC. They can break it. Some attorneys advise that that such inclusion adds some resistance.
4) GM incentive is a good option.
5) In many cases GM does not have substitute options. If the business is so dependent on GM, you are at risk even if he/she stays.
6) Check what kins of employment agreement already exist.