By Judge Ruth Kraft
What is the status of your employment agreements, employee handbook and other documentation? Prospective clients tell me all the time that they would love to hire me, but have other, seemingly more pressing needs for the money. While I understand this, it can be an extremely short-sighted viewpoint.
Recently, a client telephoned to say that he wanted to sell his business. He did not have written employment agreements and non-compete clauses. When a company evaluates a potential acquisition, the existence of these documents, as well as their quality, will be taken into account. A recent federal court decision makes it clear that employment, non-competition and non-solicitation agreements are assets which can be transferred to and enforced by purchasers. This includes content, such as restrictive covenants, which may not have been specifically disclosed to the purchaser of company stock because they were not deemed “material” at the time of the transaction.
The courts may draw a distinction between the purchase of assets and the sale of stock; in the purchase of assets or assumption of a liability, contractual rights and obligations may not transfer to the purchaser unless explicitly articulated in the contract.
It is important for employers whose documentation contains such protections to insist that their accountants attempt to quantify their value as a prerequisite to the sale of the business. Certainly, in the non-solicitation or non-compete context, a dollar value should be placed upon the potential damage to the entity if an employee breaches the covenants. This will increase the value per share and resound to the employer’s benefit.
Similarly, the absence of cogent and up-to-date information, in this age of enforcement initiatives, creates exposure and this should be considered as a business liability.
Bottom line: before you sell, clean up your documentation to protect your interests. You will reap the benefits both in terms of your employment structure and as a prospective seller.
The Standard Employment Contract does have the appropriate restrictive covenants for employees. Every sale of alarm contract accounts comes with various issues that the buyer raises that influences not only the price [in alarm deals a "multiple"] but whether the deal gets done at all. One recurring issue is whether key employees are under contract that restricts them. Get and use the Employment Contract.
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