Trend Tracker September/October 2023October 17th, 2023 by Nathan Hobbs
Covering Your Assets: Noncompete Agreements Can Be a Win-Win for Everyone Involved
By Michael Collins
Some door and window companies are passed down to the next generation of a family. Others
become employee stock ownership plans (ESOPs) or are purchased over time by the management team that is in place. The good news is—steps taken to maximize the value of a company are beneficial even to companies that are never sold. Some methods require action, but others, interestingly, require inaction on the part of a business owner. For example, if you have not granted another party a right of first offer (ROFO) or, worse, a right of first refusal (ROFR) on acquiring your business, you should not do so.
Over time, when we’ve encountered situations in which such rights were granted, they typically have two things in common: they represented a valuable option given to the other party for which they were not required to pay or contribute capital and they were granted to parties that lacked the financial wherewithal or experience to acquire the business. Such options can interfere with the eventual sale of a company. If you’ve already granted a manager such an option, it would be advisable to try to negotiate the cancellation of that agreement, possibly in exchange
for a special bonus to be paid in the event of a change in control of the business.
The Return of Non-Competes
Non-compete agreements have come back into focus recently, in connection with litigation stemming from the departure of key employees following the acquisition of Beacon Roofing Supply by Foundation Building Materials. A company ideally would have non-competes and employment agreements with key employees that have relationships with customers and access to
customer information. Such agreements would spell out the conditions under which the employee could or could not enter into a competing business upon leaving the company. They also would likely be prohibited from soliciting away customers or employees of the company they’ve left. If your company has such agreements in place, great. Evergreen agreements without a termination date are ideal. Also, don’t make the mistake of failing to obtain these agreements from new hires.
If you don’t have these agreements in place, you will likely need to offer managers an incentive to induce them into signing them. Such incentives may include aligning bonus agreements discussed already. In this way, the owner of the business isn’t perceived as asking for something valuable from the employee without offering anything in return. Instead, everyone signing such agreements and benefiting from such bonus agreements is committing to the common goal of making the company a more valuable and profitable enterprise. Business owners find it vastly preferable to put such agreements into place when they are not currently engaged in selling their business.
Managers are more likely to be suspicious of these standard terms when they come from an unknown buyer.
We have found that most managers fear an outcome where they contribute to the success of a sale,
only to be let go shortly afterward. The good news for managers is that, having closed dozens of deals over the past 20 years, we could count on one hand the number of manager positions that were eliminated because of these deals. More commonly, the sale of a company results in managers receiving things such as additional leadership responsibilities, promotions and modest compensation increases. That all sounds like a win for everyone involved.
Michael Collins is an investment banker and a partner in EquiNova Capital Partners.
He specializes in mergers and acquisitions in the door and window industry.
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